Banking in Australia

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The banking sector in Australia consists of a number of banks licensed to carry on banking business under the Banking Act 1959, foreign banks licensed to operate through a branch in Australia, and Australian-incorporated foreign bank subsidiaries. The banking system is liquid, competitive and well developed. For the past 10 years ended in mid-2013, Commonwealth Bank got the first rank of Bloomberg Riskless Return Ranking with returned a risk-adjusted 18 percent. Westpac Bank set in fourth with 11 percent and ANZ Bank set in seventh with 8.7 percent.^[1]

The first bank to be established in Australia was the Bank of New South Wales, which was established in Sydney in 1817, with Edward Smith Hall as its cashier and secretary.^[2] During the 19th and early 20th century, the Bank opened branches throughout Australia and Oceania: at Moreton Bay (Brisbane) in 1850, then in Victoria (1851), New Zealand (1861), South Australia (1877), Western Australia (1883), Fiji (1901), Papua New Guinea (1910) and Tasmania (1910).

In 1835 a London-based bank called The Bank of Australasia was founded that would eventually become the ANZ Bank. In 1951, it merged with the Union Bank of Australia, another London-based bank, which had been formed in 1837. In 1970, it merged with the English, Scottish and Australian Bank Limited, another London-based bank, formed in 1852, in what was then the largest merger in Australian banking history, to form the Australia and New Zealand Banking Group Limited.

A speculative boom in the Australian property market in 1880 led to the Australian banking crisis of 1893 in the colony. This was in an environment where little government control or regulation of banks had been established yet and led to 11 commercial banks failures.

As with many other countries, the Great Depression brought a string of bank failures. Two of the state-owned savings banks (of NSW and WA) would be bought out by the then federal owned Commonwealth Bank.

From the end of the Great Depression banking in Australia was tightly regulated. Until the 1980s, it was virtually impossible for a foreign bank to establish branches in Australia; consequently Australia had very few banks when compared with such places as the United States or Hong Kong. Moreover, banks in Australia were divided into two distinct categories, known as saving banks and trading banks. Saving banks paid virtually no interest to their depositors and their lending activities were restricted to providing mortgages. Many of these savings banks were owned by state governments. Trading banks were essentially merchant banks, which did not provide services to the general public. Because of these and numerous other regulatory restrictions on banks, other forms of non-bank financial institutions flourished in Australia, such as the building society and the credit union. These were subjected to less stringent regulations, could provide and charge higher interest rates, but were restricted in the range of services they could offer. Above all, they were not allowed to call themselves "banks".

Originally the role of central bank was performed by the Commonwealth Bank of Australia, then a government-owned but essentially commercially-operated banking organization. This arrangement caused some discomfort for the other banks, and as a result the central bank function was transferred to the newly created Reserve Bank of Australia on 14 January 1960.

The banking industry was slowly deregulated over the next two decades. The distinction between trading and savings banks was removed and banks were allowed to operate in the money market (traditionally the domain of merchant banks).

The boom and bust of the 1980s was another turbulent time for banks, with some establishing leading market positions, and others being absorbed by the larger banks. The 1990s saw the privatisation of the Commonwealth Bank, and increased competition from non-bank lenders, such as providers of securitised home loans.

At the time, consumer credit in Australia was primarily loaned in the form of installment sales credit. The arrival of hundreds of thousands of readily employable migrant workers under the post-war immigration scheme, coupled with intense competition amongst lenders, discouraged proper investigation into buyers.^[3] Concerns about the possibly inflationary impact of lending created the first finance companies in Australia.^[3]

No changes were made in parliament to address misallocated capital, even as most Australians were seeing their real incomes declining.

Currently, the Australian banking sector is dominated by four major banks: Australia and New Zealand Banking Group, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation.

In 1990, the Commonwealth Government of Australia announced that it adopted a "four pillars" policy and would reject any mergers between the four major banks.^[4] This is long-standing policy rather than formal regulation, but it reflects the broad political unpopularity of bank mergers. A number of leading commentators have argued that the "four pillars" policy is built upon economic fallacies and works against the nation's better interests.^[5]

The top four banking groups in Australia ranked by market capitalisation at share close price 29 June 2012:

The Customer Owned Banking Association (formerly known as Abacus Australian Mutuals) is the industry body representing the more than 100 credit unions, building societies and mutual banks that constitute the Australian mutual or cooperative banking sector.^[10]

Collectively, Australian customer owned banking institutions service 4.6 million customers or 'members' (as they are mutual shareholders in the institutions), with total assets of over A$85 billion.^[11] The ten largest customer owned banking institutions in Australia are:^[12]

Heritage Bank is Australia's largest customer-owned bank, having changed its name from Heritage Building Society in December 2011. A number of credit unions and building societies changed their business names to include the word 'bank', to overcome adverse perceptions of smaller deposit-taking entities. For example, in September 2011 bankmecu was announced as Australia's first customer-owned bank.^[14]

Three teachers' credit unions have become known as 'banks'; namely, QT Mutual Bank (formerly the Queensland Teachers' Credit Union), Victoria Teachers Mutual Bank (formerly the Victoria Teachers' Credit Union), and Teachers Mutual Bank Limited (formerly Teachers Credit Union Limited).^[15] The Police & Nurses' Credit Union began trading as P&N Bank in March 2013, and some credit unions are electing to use 'mutual banking' as a business tagline, rather than as a business name, as they do not meet the criteria to be called a 'bank'.^[16]

Competitors to the 'big four' banks include smaller and often regional banks, including the Bendigo and Adelaide Bank, Suncorp-Metway, the Bank of Queensland and ME Bank. Other banks, and Bankwest are owned subsidiaries of the big four.

Foreign banks wishing to carry on a banking business in Australia must obtain a banking authority issued by APRA under the Banking Act, either to operate as a wholesale bank through an Australian branch or to conduct business through an Australian-incorporated subsidiary.

Foreign banks which do not wish to obtain a banking authority in Australia may operate a representative office in Australia for liaison purposes, but the activities of that office will be restricted.

According to the Foreign Investment Review Board, foreign investment in the Australian banking sector needs to be consistent with the Banking Act, the Financial Sector (Shareholdings) Act 1998 and banking policy, including prudential requirements. Any proposed foreign takeover or acquisition of an Australian bank will be considered on a case-by-case basis and judged on its merits.

There are a number of foreign subsidiary banks, however only a few have a retail banking presence; HSBC Bank Australia, Bank of Cyprus Australia Limited, Beirut Hellenic Bank and Citibank Australia have a small number of branches.

Foreign banks have a more significant presence in the Australian merchant banking sector.

Australia's banking regulation is extensive and detailed. It is split mainly between the Australian Prudential Regulation Authority (APRA) and Australian Securities and Investments Commission (ASIC).

APRA is responsible for the licensing and prudential supervision of Authorised Deposit-Taking Institution (ADIs) (banks, building societies, credit unions, friendly societies and participants in certain credit card schemes and certain purchaser payment facilities), life and general insurance companies and superannuation funds. APRA has issued capital adequacy guidelines for banks which are consistent with the Basel II guidelines. All financial institutions regulated by APRA are required to report on a periodic basis to APRA. Certain financial intermediaries, such as investment banks (which do not otherwise operate as ADIs) are neither licensed nor regulated under the Banking Act and are not subject to the prudential supervision of APRA. They may be required to obtain licences under the Corporations Act 2001 or other Commonwealth or State legislation, depending on the nature of their business activities in Australia.

ASIC has responsibility for market integrity and consumer protection and the regulation of certain financial institutions (including investment banks and finance companies). However, ASIC does not actually investigate any issues or propose any regulations that concern consumer protection.

Banks are also subject to obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 as "reporting entities". They are required to identify and monitor customers using a risk-based approach, develop and maintain a compliance program, report suspicious matters and certain cash transactions and file annual compliance reports. The Australian Transaction Reports and Analysis Centre (AUSTRAC) has primary regulation and oversight responsibility for AML and CTF under the 2008 act.

• Connect Financial
• Economy of Australia
• Financial system in Australia
• List of banks in Australia
• Timeline of banking in Western Australia

• Australia's Banking History, ABC
• Current Australian lender’s standard variable interest rates, Finder.com.au