For Part 1 of this series click here.

In 2014, the Financial System Inquiry in its Interim Report concluded that, “[m]ost sectors of the Australian financial system are concentrated”. Singling out the banking system as one of those sectors with a “relatively high degree of market concentration”, including by international standards, the Report noted that banking’s concentration had increased since the global financial crisis.

The Report discerned the link between concentration and competition. “Market concentration can be a by-product of competition,” it said.

The concentration of banking in Australia, particularly the consolidation of the “Big Four” banks (NAB, Commonwealth Bank, ANZ and Westpac), encapsulates a structural dynamic, and has brought the banking system to a crossroads: continue with the trend of market-driven concentration under the impetus of competition – with the attendant scandals about banking practices and calls for heightened scrutiny, even, possibly, a Royal Commission into banking – or reassert a more social role for banking?

If the Chifley Labor Government’s attempt to nationalise the private banks in the 1940s was the high-water mark of attempts to “socialise” Australia’s banking system, the tide ebbed slowly. There remained a social dimension to banking activities, while government involvement in, and oversight and direction of, the banking system continued and was refined.

The first decades after the Second World War were times of immense change in Australia: a huge increase in population – over 3 million in 20 years – including from mass immigration; development and transformation of secondary industry (eg mass car manufacturing); a rapid rise in the production and consumption of durable consumer goods (eg washing machines, vacuum cleaners and fridges); virtually full employment; and government-led “nation-building” schemes, such as the Snowy Mountains scheme.

These developments were cumulative and dynamic. Banks made a vital contribution, helping mobilise capital for economic development. For example, the government-owned Commonwealth Development Bank was established to provide finance for primary and secondary industry, while the Australian Resources Development Bank was set up by the trading banks to help fund large-scale projects in the development of Australia’s natural resources. The Reserve Bank, established in 1960 as the country’s central bank, served as a mechanism for stabilising the economy (eg through credit control) and played this role to good effect during financial crises in the 1960s.

The economy stabilising function of the Reserve Bank (set up by the avowedly pro-private enterprise Menzies Coalition Government) highlighted the banking system’s full integration into the body politic. This was a merger of the traditionally sharply divided conceptions of banking’s proper role: as either an instrument of public policy serving societal objectives; or an agent for mobilising capital to facilitate economic growth in a free market economy with the corollary of private wealth accumulation.

The evolved conception of banking was also reflected in the activities of the government-owned Commonwealth Bank in these years. Addressing the serious shortage of housing in the post-war years for a rapidly growing population was a pressing social need. The Commonwealth Bank provided finance for housing construction and, from 1946, began to offer home loans. The latter represented a new orientation of the bank: seizing commercial opportunities presented by the times, while simultaneously contributing to the fulfilment of a public good. It represented the integration of public and private imperatives – the need for people to have a roof over their heads, and the satisfaction of private desires for home ownership.

This was a time of seemingly never-ending economic growth; for instance, surging demand for housing finance (resulting in a huge expansion in the 1960s and 1970s in the share of national financial assets held by building societies). Fed by consumer demand for new financial products, the Commonwealth Bank with its new and enthused commercial orientation expanded its operations. Personal loans, variations on savings accounts, Christmas Club accounts, were all introduced. In the 1970s, there was diversification into a range of new areas: home insurance; life insurance; managed investments; and travel.

The 1970s and 1980s also saw technological changes which revolutionised the way banks produced and provided their products. Computerisation, plastic credit cards, automatic teller machines and electronic funds transfer all transformed the way transactions were conducted, and increased the availability of funds and credit for consumers.

Against this background, the transition of the Commonwealth Bank from a government-owned entity to a private business seems inevitable. Developing as a big and lucrative business, it would have been attractive to potential investors; and with the banking and finance sector generally playing a more central role in the Australian economy, and able to influence the direction of public policy in a direction away from centralised government control over banking. Perhaps also, there was complacency within the community that the banking system was mature and sound enough to be trusted to operate without too much government oversight.

The decisive factor leading to the eventual transition of the Commonwealth Bank from a government-owned bank, were decisions of federal governments, both Labor and Coalition, which increasingly embraced policies of economic liberalisation. Starting from 1973, when trading banks were given permission to control interest rates on wholesale deposits, through to the 1979 Campbell Committee inquiry into the financial system, there was “a gradual movement to market-orientated methods of implementing monetary policy, away from a system of direct controls on banks”.

The deregulatory thrust of government policy picked up pace in the 1980s following the end of the long post-war era of full employment and stable economic growth. Governments looked to the unhindered operation of market forces as the means to dealing with perennial economic crisis.

The Hawke Labor Government deregulated Australia’s financial system: the Australian dollar was floated; controls on foreign exchange and direct controls on interest rates were removed; and foreign banks were allowed to begin operations in Australia. Intensifying competitive pressures within the banking sector led the Commonwealth Bank to develop products and services to win new customers and shore-up its position in a globalizing economy. Momentum gathered towards privatisation of the bank, particularly given its primary focus now on the supply of products to customers (ie “retail banking”). Privatisation was completed in a staged-process between 1991 and 1996.

Financial deregulation, of which the privatisation of the Commonwealth Bank was one outcome, was taken further following the Wallis Inquiry into the financial system. Set up by the Howard Coalition Government in 1996 to review regulation of the financial system, the Inquiry made recommendations for a financial regulatory environment aimed at providing “an efficient, responsive, competitive and flexible financial system”.

The Wallis Inquiry recognized that in recent decades, financial institutions had diversified in their activities (seeking “new profit opportunities for old industries”) and become increasingly interrelated. Financial conglomerates had arisen which held 80 per cent of Australia’s financial system assets. The inquiry also identified “pressures emanating from technological advances and globalisation of markets” as likely to induce further product expansion and conglomeration in the coming years. In devising a regulatory response to these developments, the Inquiry advocated for the removal of the hitherto different regulatory arrangements for different parts of the financial system, such as banks and building societies.

Called “seamless” regulation, the proposed changes would include that “all finance conglomerates” not be restricted in the number or class of licences they could obtain and be able to conduct non-regulated financial activities. Flowing from the recommendations of the Wallis Inquiry, the Australian Prudential Regulation Authority was established, and between 1998 and 1999 it took on responsibility for the prudential regulation of banks, insurance companies, superannuation funds, building societies and credit unions. The Reserve Bank lost its banking supervision function, but retained responsibility for monetary policy, financial stability and the payments system.

The relationship between the banking system and the state was further evolving. In an era of heightened competition (including global competition), and “seamless” regulation, the “Big Four” banking behemoths emerged: the Commonwealth Bank; ANZ; National Australia Bank; and Westpac. They were multi-billion dollar businesses dominating the Australian financial landscape. By 2009, they were providing almost 100 per cent of new home loans. During the global financial crisis, the Rudd Labor Government introduced the Australian bank deposit guarantee scheme as a measure to protect the banking system. This was a boon for the Big Four banks due to their economies of scale. Such had become their centrality to the stability of Australia’s economy that the Federal Government felt obligated to underpin their operations, rather than closely supervise them.

In recent years, banks have frequently found themselves the objects of criticism over a series of scandals involving unscrupulous practices in relation to the provision of financial services and products, leading to calls for tougher scrutiny of banks and even for a Royal Commission into banking. Additionally, there has been much criticism of new and increased fees introduced by banks. Part of the problem is that the comparatively unfettered pursuit of commercial opportunities under the pressures of competition, including costly takeovers of competitors and questionable speculative activities, has compelled and enabled banks to engage in practices which, in some cases, may possibly be criminal.

Some advocate that the best way forward is to allow market discipline to moderate the way banks conduct their activities, and that this is best achieved by allowing them to operate on the basis of self-regulation.

In considering the best approach to take for the future of Australian banking, there is also an argument that its pivotal importance to the economy should be acknowledged by government – not by government acting in an effectively submissive way to the largest banks, but by requiring the banks to take their social responsibilities seriously. According to this argument, tighter regulation over such things as interest rates on home loans and for small businesses and small farmers, and on bank fees, would be necessary.

Establishment of a government-owned bank, with a social charter obligating it to serve community needs and goals – including economic development – and ultimately answerable to the people, would also be consistent with this approach.

This is the final in a three-part series of posts on banking in Australia (see Part 1 and Part 2) arising from updated The Laws of Australia Subtitle 18.2 “Types of Financial Institutions”.

For more information about The Laws of Australia, click here.