Regulation and Australian Financial System

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Historical review

The Australian financial system evolved in five stages. The first stage was the introduction of financial institutions during the early colonial period in the 19th Century, where the influence of British institutions was a key driving force. The end of that period was marked by the 1890s depression which saw a major rationalisation of Australia’s financial institutions. The start of the modern era of financial regulation can be traced back to the introduction of banking legislation in 1945 and the establishment of Australia’s first central bank.

In more recent times, Australia has seen two major waves of financial reform. The first wave, in the1970s and 1980s, involved a major deregulation exercise which transformed Australia’s financial system. In keeping with other policy measures aimed at opening Australia to increased trade, investment and international competition. A second wave of reform in the 1990s sought to address new regulatory issues that arose in the post-deregulation period. Financial sector reform did not occur in a vacuum but occurred in the context of a significant era of reform of the Australian economy. Reforms in other areas, and their relationship with the financial sector reforms, are also discussed in this section.

Foundations of the Australian financial sector
Origins of Australia’s banking system

Australia’s monetary and banking system originated in the 19th Century and was modeled on British laws and institutions. Commercial banking began in Australia in 1817 with establishment of the privately-owned Bank of New South Wales, which issued legal tender. This was followed in 1819 by the first savings bank, the New South Wales Savings Bank, which held for safekeeping the moneys of new arrivals to the colonies (Peat Marwick 1985: 1). The number of banks expanded over the course of the 19th Century, including in the new territories of Victoria and South Australia. British banks took the lead in expanding the financial system of the Australian colonies. They introduced large amounts of capital, provided channels for the inflow of British investment, established foreign exchange markets, encouraged interest rate competition, and began the development of a branch banking network. Growth in the banking sector was driven in the first half of the century by rapid expansion of the pastoral industry.

The discovery of gold in the 1850s in Victoria was a driving force behind growth in the second half of the century. This latter period resulted in the establishment of more than 30 new colonial banks and several British banks. By the 1890s, more than 1000 branches had been established and retail branch banking became widespread. The 1890s depression provided a watershed period in the history of Australian banking. During the 1880s, Australia saw increases in investment associated with extraordinary levels of building activity and property market speculation. At the same time, banks took on higher levels of risk in order to maintain 0-3 market share in the face of competition from non-bank financial institutions, such as building, pastoral and mortgage companies. Consequently, the collapse of the real estate market during the depression years led to a series of bank crashes and brought home to the banking industry the need for better prudential practices (Peat Marwick 1985: 1).

Between 1891 and 1893 only 10 out of 64 banks were not forced to close or refuse payment for longer or shorter periods (Gollan 1968: 28). The result was the rationalisation of the industry into a smaller number of viable banks. It also led to pressure for a national bank along the lines of the Bank of England and for a paper currency in order to stabilise and protect the financial system (Gollan 1968:18). However, action for a central bank would have to await Federation (Lewis and Wallis 1997: 49).

Evolution of the central bank

With the Federation of the Australian states into the Commonwealth in...
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