Australian Banking System

The first bank formed in Australia was the Bank of New South Wales, in 1817. Before long there were other banks formed and a competitive situation arose. Back then a bank’s primary functions were to receive deposits for safe keeping, and to loan money to lenders. Based on the balance sheet they were able to issue bank notes as security against their assets. It was therefore good business to lend more money (the bank’s asset) than hold deposits (the bank’s liability).

There was no central bank and each one was stand alone and there were frequent bank collapses throughout the 19th century. In 1893 a series of fraudulent activities in Victoria triggered an event that caused the collapse of 12 banks. This had a huge impact on the Australian Banking system at that time, since the 12 banks that collapsed accounted for a large percentage of banking assets in Australia increasing pressure for the Federal Government to take control of the banking system.

So in 1911 the Commonwealth Bank was formed to issue currency which would supply the nation with one consistent legal tender. So from 1911 to 1957 the Commonwealth Bank was the controller of the nation’s currency and stability took over from the chaos of former years. Between 1894 and 1979 only three banks collapsed in Australia and they were all in the year 1931 – during hard times internationally and well as locally.

In 1957 the Reserve Bank of Australia was created. And they immediately took tight control of the banking sector, until the boom times began and to escape the restrictions imposed on the banking sector many finance companies sprang up. These companies quickly expanded to lend money for anything from cars, to houses, to household goods. Banks were still controlled by the Reserve Bank of Australia, but the finance companies, merchant banks, foreign banks and to a point state banks were not under their control.

The whole money industry evolved in the search for profitability and in doing so, many lending decisions were made that lead to unsatisfactory outcomes. By the 1970s, so serious were some of these unsound decisions that many financial institutions began to collapse, creating panic withdrawal runs on building societies and finance companies Australia wide. Many institutions collapsed completely, or had to be rescued by the regulated banks, leaving no doubt in the mind of those that survived that a more cautious way of working was required going forward.

In 1983 the Federal Government stepped in once again, deregulating the Australian banking system, and allowing foreign banks to enter the market. At the same time the Australian dollar was floated on the international monetary exchange. This accelerated competition even more, resulting in lower interest rates on lending, and a greater level of risky lending. Banks collapsed once again, and had to regroup to survive.
Today Australia is dominated by four major banks, the ANZ, Commonwealth, NAB and Westpac, with many other smaller and less prominent banks building societies and finance companies giving them a "run for their money” and helping to maintain the competitiveness of the finance sector.