History of Banks
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. 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).
The ANZ Bank began as a London-based bank, called The Bank of Australasia in 1835. 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.
Historically, banking in Australia was tightly regulated. Until as recently as 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".
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.
In 1961, central bank duties were transferred from the Commonwealth Bank to the newly created Reserve Bank of Australia, and 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.
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.
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. Concerns about the possibly inflationary impact of lending created the first finance companies in Australia.
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.
The Australian government has a "four pillars" policy that prevents mergers between the four major banks. 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. Recently, Australia's "big four" banks are in fact in the world's top 12 banks, due to recent collapses of large banking corporations.
The top four banking groups in Australia ranked by market capitalisation at share close price 5 July 2011:
Other retail banks
Competitors to the 'big four' banks include smaller and often regional banks, as well as building societies and mutual credit unions. Among regional banks are Bendigo and Adelaide Bank, Suncorp-Metway (now known as Suncorp), Bank of Queensland and ME Bank. The number of building societies in Australia is dwindling as is the number of credit unions. APRA put the number of building societies at June 2011 at 10 and the number of credit unions at 103. A number of credit unions are adopting the term bank in order to overcome adverse perceptions of smaller deposit-taking entities. For instance, the teachers credit unions in Queensland and New South Wales took this step in the second half of 2011.
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 Investment Commission (ASIC).
APRA is responsible for the licensing and prudential supervision of 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 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).
Banks are also subject to obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2008 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.