Current Structure of the Australian Banking Industry Paper Example

The banking industry in Australia has four significant banks dominating the market. Within the framework of a broad and deep economic transformation program, Australia undertook great financial reforms in the first half of the eighties. The dominance of the four banks at the national level is at 72% of the total market share. This concentration was made possible by several mergers in the 1980s where the number of private banks reduced from six to three. Concentration ratio is a measure of a market share, which is currently held by the four major market participants (Weerasooria, 2000).

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At first, they had liberalized the operations of national intermediaries existing, primarily commercial banks activities, and the entry of new foreign participants to the market, to then release interest rates and introduce universal banking. Simultaneously, in the external sector, the adoption of a floating exchange rate regime for the Australian dollar and the opening of the capital account substantially modified the conditions of the insertion of the country in the international financial sphere.

In a second stage, which started in 1988, financial reforms were concentrated in strengthening supervision and system regulation, in response to the elevation of the level of risk that entailed liberalization and the deterioration of economic situation that manifested itself in a higher level of bank and past due loans in bankruptcies of non-financial companies and of local banks. In 1997, when it exploded the crisis in Asia, the financial system of the country was profoundly transformed for almost fifteen years of reforms, and one could wonder if the changes that had boosted their growth they had also managed to strengthen its resistance to economic shocks. Price stability that comes with the oligopolistic nature of the Australian banking industry helps consumers have a good plan that helps in stabilizing their expenditure. In return, trade cycle secures.

Economies of large-scale operations-the branch banking system enable the Australian banks to possess considerable financial resources. Through the spread to various regions through branches, the banks enjoy the benefits of operating on a large scale. They appoint highly trained staff increasing the efficiency in management. The division of labor applied by the banks enhances the greater economy in the bank's operations. Through the super-normal profits that the banks make, some portion gets used in innovation, which is a benefit to the consumers.

For fifteen years, Australia has seen economic growth rates above those of average or developed economies of the Organization for Cooperation and Economic Development (OECD). Indeed, since 1992, once the recession ended 1989-1991, associated with the completion of the real estate and share bubble product of financial liberalization and to the depreciation of the national currency, the real gross domestic product of the country has grown at an average annual rate of 3.75% in an environment of low rates of inflation. Australia has maintained positive growth in all these years, in contrast to the experience of other biggest business partners like the United States, Japan, the European Union and the countries of East Asia in general, which they all experienced in their moment periods of recession. These rates of sustained growth have allowed the country recover part of the range that had lost in terms of living standards between the fifties and nineties, at increase the per capita income of its inhabitants, which today exceeds by more than 10% Oceans average: between 1991 and 2005, the current income per capita increased in more than 40%, going from 7,568 Australian dollars to 10,671.

The current level of employment is high, and the demand internal in all its components (consumption, productive investment, investment residential) has remained steady at throughout the period, which has allowed compensate at certain times the weakness of external demand. This excellent performance of the Australian economy gets generally attributed to the effects of positive aspects of the reforms undertaken at the beginning of the eighties. The IMF attributes these achievements to deregulation of markets, in particular from the financial sphere to privatizations and the increase of internal competition as external, which would have appeased Strengthening productivity.

Also, adoption of a floating exchange rate in 1983 improved the stability of the economy, because it allowed coping with greater flexibility to the various external shocks to which he was exposed and facilitated the implementation of specific reforms; at the same time, the independence monetary policy that this regime provided favored the stabilization of the active economic internal.

Throughout these two decades of floating, the exchange rate of the Australian dollar experienced very broad fluctuations, with an initial depreciation 40% in 1984-1986 that launched an export growth phase, followed by opposing movements associated in particular to the trajectory of the terms of the country and, as of 2001, of a very wide appreciation.

The elevation of risk for internal agents has received compensation for widespread practices of coverage (hedging) of their positions in foreign currency. Now, investment and growth of the Australian economy have strongly supported in external financing. If the periods of greatest depreciation of the national currency have implied surplus fleeting in the country's trade balance, the current account balance has been in deficit throughout the period, and the gap has reached great magnitudes. Calculated about GDP, it established an average of 4.5% since 1990 and had tended to deepen in the past years, with respectively 5.9, 6.4 and 5.7% in 2003, 2004 and 2005. This implied a growth of the country's external debt, in both gross and net terms, the deficit, and especially the one intermediated by financial institutions, has been the privileged entry vehicle of external financing: the net debt of the country rose from 35% of GDP in 1990 to more than 50% in 2004, and it is generated at 97% by the private sector.

The financial reforms undertaken in the eighties have led, on the one hand, to a remarkable deepening process financial: the assets of the institution's economic costs have risen around 120% of the GDP in the mid-eighties to more than 200% before the Asian crisis. This expansion has been accompanied by a rapid process of institutional diversification and opening the system. On the other hand, the opening of the capital account of the balance of payments has allowed making a rapid integration of the country international financial system, which in turn, has strengthened the development of internal financial markets. The commercial opening of the country and its greater integration in the international business sphere reflects the evolution of its global assets and liabilities. Both assets and liabilities have risen sharply from the opening, and this process has accelerated after mid of the nineties. The flows primarily get generated by the private sector; the amortization of public external debt has marked great official flows.

Oligopolistic nature of the Australian Banking Industry has some shortcomings. With the rise in concentration, the consumers' choices reduce. Oligopolistic nature promotes a lack of competition in the industry, which may result in the manipulation of consumers' decisions. This interference makes the decision making process complex. The consumers fall back to heuristics which can cause decision-making bias and irrational economic behaviors.

Conclusion

As the central banks dominate the industry, aspiring firms can be opposed to establishing units in the industry as a result of barriers to entry. This opposition further increases the chances of losing economic welfare. The lack of completion results in possible inefficiency in production and allocation of resources. Concerns have been raised on the current mergers as it may reduce the competition in the banking industry.

References

Weerasooria, W. S. (2000). Banking law and the financial system in Australia. Butterworth-Heinemann.