The Australian banking sector
a. How has the performance of the Australian banking sector changed over the past 10-15 years?
The summary analysis in June 2004 of the Australian Bankers association (based on data from 1998) is as follows:
(1) The regulatory framework, together with the activity surveillance system of the government of Australia to monitor its banking industry is very dynamic and sound. Australia believes that the interconnected yet independent functions of the participants to the banking regulation are the bastion of its strength. The conglomerate objectives and actions of these various government overseeing agencies in ensuring the sustainability of the banking services in Australia are unanimous in nature and coherent in their processes and methodologies.
(2) In a breakthrough report initiative entitled “Financial Stability Review” of March 2004, the Reserve Bank of Australia conclusively defined the commendable standing of the financial system of Australia. It is strong; it is profitable; it is exposed to minimum bad debts; and it holds excess capitals. International consensus acclaim that Australia has one of the highest banking industry capitalization in the world. Moody’s Bank Financial Strength Index has rated the Australian financial system as one of the most sound in the whole world. With assets at 1.3%, the profit ratio of the Australian banks is internationally identified to be of medium profit margin.
(3) The ability of the banking industry of Australia to withstand any economic downturn has been established to be commendably qualified. It is resilient to any hypothetical increase in mortgage defaults and property price declines. The strength and stability of the ADI sector of Australia warrants protection to the safety of the depositor’s savings from medium to long term basis.
(4) The board accountability, disclosure, corporate governance and lending policies of the banking industry of Australia have been rated as above average – as attested by Governance Metrics International. Proof, for example, is that the credit card default in Australia has been steadily falling since 1998. The effect on consumer confidence and well-being has been very positive for they stand be responsible and financially righteous.
On the other hand, the Reserve Bank of Australia did a study of the productivity capability of the Australian banking sector – with data availed from banking performance UP TO 1995 only. The core of the analysis is the mid- to late 80’s to early 90’s banking performances. The focus of the study of the Reserve Bank of Australia is the National Bank of Australia. The objective is for the banking industry to sort of “awaken” to re-adapting or re-adopting their policies and strategies to stabilize and assure growth.
Firstly, the RBA report indicates that during the said period of time, there was a decline in the ratio of operating costs to net income of Australian bank. This has reportedly shown a possible improvement in the industry’s efficiency and a gain in productivity – although, it was not taken to be too conclusive.
Secondly, the output efficiency of the banking sector in Australia is low because Australians have been defined at that time to be averse to pay service charges and fees for the services they get from banks. Banks generate income from “wide interest rate spreads on transaction accounts”. Therefore in this aspect, the banking system of Australia is inefficient in its allocative output.
In conclusion, the Reserve Bank of Australia report has indicated a tentativeness of the evidences and analysis they have gathered and provided. Yet, the report is confident on the positive track that the banking sector has been performing in the 1990’s and believes in the promise thenon.
b. What factors seem to be driving these changes?
Based solely on the report of the Australian Bankers Association, the following pinpoints to the factors that drove the commendable merits of the industry from turn of the 2nd millennium:
(1) The soundness of the regulation and surveillance system of the government of Australia is due to its policy to meet the international standards of the Basel Committee of the Bank of International Settlements.
(2) The commendable standing of the Australian financial system is a result of the 13-year continuous expansion and growth of its domestic economy and the government’s resolutions to improve its management of credit risks after it experienced problems in the early 1990’s.
(3) The resiliency of the banks in Australia is always reviewed and monitored by the Australian Prudential Regulation Authority, especially thru a stress test called Project Panama they conducted in 2003. The regularity of these tests is fastidiously and religiously conducted on a quarterly basis and serves as a warranted basis for not only national parameters of efficiency but likewise internationally.
(4) The above average governance and lending performance of the Australian banks was the result of the country’s and the industry’s of a revised Code of Banking Practices from 1993, anchored on customer benefits and responsive participation in the banking governance and lending management programs. The Australian Bankers Association goes to the extent of “educating” banking clients on how to manage their finances and credits. The association likewise worked with the government to curtail cyber-crimes and banking frauds.
c. What are the financial and economic relationships between the Australian and the New Zealand banking sectors.
Ø 66.1% of New Zealand banking system assets are owned by Australians (i.e., 7 out of 18 registered banks in New Zealand are Australian-owned)
Ø Each of the 4 major Australian banks are represented in New Zealand
Ø New Zealand banks are provided with significant funding from its parent bank in Australia.
Ø New Zealand banks depend on their parent banks in Australia for operational support, like computer processing activities.
Ø Generally, there is no major difference between the returns on assets earned by the Australian and New Zealand businesses.
Ø Because of the extent of the integration between the Australian and New Zealand economies and between their banking systems in particular, there is a fair degree of similarity in the bank performance
Ø However, the median efficiency of New Zealand banks is 0.940 while Australian banks posed a median efficiency of 0.874 – i.e., significantly different at 0.02%
d. Critically compare and contrast the trade association and academic approaches: what are the similarities in the analyses? What are the differences?
Comparing and contrasting the trade analysis presented by the Australian Bankers Association (ABA) and the academic analysis of the Reserve Bank of Australia (RBA) will be a stretch of effort because there is a decade difference in the data that served as the basis of the respective analysis. It is a major consideration in the objective of comparing and contrasting because there seemingly has been a transition on the parameters surrounding the different periods of time. There is considerable significance in the distance of time because so many things can happen with regards to not just micro indicators but likewise macro indicators. The temperament and volatility and challenges of the market likewise play a role in changes in economic and financial parameters.
Firstly, the analysis of ABA surrounds the overall and long term and global efficiency of services and transparency of governance rendered by the banking industry in Australia. Restrictively, the analysis of RBA surrounds the categorical productivity or ability to turnaround income by the banking industry.
Whatever incompetence evaluated by the RBA that touches the transparency, management, governance of the banking industry to effect productivity – have been seemingly addressed to by the various courses of action by the government of Australia; by the banking industry – exemplified in the 2003 and 2004 initiatives of the ABA, the banking industry and the government of Australia itself. To top it all, the international authoritative bodies that are concerned about the financial and economic systems of Australia have inputted their approval of how things are being run.
e. If you were to combine the two approaches, which parts of each would you keep and which would you discard? Why?
If there is no discrepancy in the time factor of data wherein the analysis are based, the methodology, initiatives, evaluation and analysis of the Australian Bankers Association can comfortably be more commendable and adoptable, if not completely acceptable.
Trade associations are in consistent action and in grassroots involvement in the betterment of its industry. They are that astutely committed and concerned and conscious because it is their profession and source of livelihood in the first place. Secondly, the macro and trickle down cause and effects of errors, resolutions and efficiencies of their industry is for purposes of long term benefit – and not just for a one-time, on hand learning process.
Finally, the profound and incessant pursuits of trade associations to know their industry very well bode well on their ability to ascertain the profitability of their capital involvements anyway. Members; officers; stakeholders of associations are players likewise of the industries that they monitor and safeguard.
Academic studies of industries are for purposes of information gathering. Regrettably, it is not a carte blanche guarantee of an authoritative or legal character. It can serve as a guideline, yes, but not as sacrosanct in effect, compared to an analysis of a trade or industry association. Besides, a trade or industry association’s analysis has both the character of the academe and the legal authority / power required.
The overall performance of the banking industry of Australia is undoubtedly and beyond second-guessing to be at its most commendable status – nationally and internationally. Even up to this writing, it can be said that its fundamentals are up to the expectations of its citizenry and depositors and its global business partners.
Australian Banker’s Association “A strong banking system.”
“Measuring productivity in the Australian banking sector,” Alan Oster and Lawrence
Antioch, Australian Reserve Bank Occasional Paper, 1995.
Reserve Bank of New Zealand, “Efficiency in integrated banking markets – Australia and
New Zealand,” David Tripe, Massey University