Past reviews and calls for a new review
This chapter both looks back to previous inquiries into the banking
system and forward to calls for a new inquiry.
Five main inquiries into the Australian banking system, mostly
following crises, have been identified by Associate Professor Selwyn Cornish.
These are the 1937 Royal Commission, the Campbell Committee, the Vic Martin
Review Group, the Stephen Martin Report and the Wallis Report. After briefly
discussing some earlier inquiries, this chapter examines each of these in turn,
and then some recent parliamentary inquiries.
Drawing on Sir Harold Knight's
comments on the Campbell Committee, Mr Cornish described the role of the
inquiries as being:
...an agent of change rather than being the agent
of change. It hastened the process of change and it did so by refocusing a
hitherto inchoate or rather amorphous debate much more sharply on the key
issues. It provided coherence and authority. An impressive report was produced,
which set out the issues systematically. It argued judiciously and it concluded
The Committee hopes that future historians will make the same judgement
about this inquiry.
But a difference between this inquiry and earlier inquiries is that this
inquiry is more tightly focused, examining in particular competition in
the banking system. By contrast, the earlier inquiries:
...have not focused on what might be considered micro-economic
issues; they were focused more on macro issues.
...have focused on bank stability, APRA regulation issues, bank
accounting procedures and generally structural issues concerning bank
operations. The issue of competitive environment was not generally addressed,
nor do the banks encourage it to be addressed.
One difference between the various inquiries was the extent to which
they were independent of government. The 1937 inquiry was a Royal Commission
and the Stephen Martin inquiry, like this one, was by a parliamentary
committee. Of the others, Professor Valentine's view is that:
The Campbell inquiry was completely independent. In fact, I
can tell you now, many years after the event, there were some rather furious
confrontations with the then secretary of the Treasury, John Stone...He, for
example, did not want the committee to recommend a floating exchange rate. The
Wallis committee was half and half. It had an independent committee but the
secretariat was...basically a Treasury secretariat.
A common feature is that they were initiated by governments in response
to public concerns. It has been noted that governments have reflected concerns
about banks in their rhetoric for a long time:
Looking at it over the last 20 years, every Treasurer, Prime
Minister and minister has attacked the banks, verballed them, said awful
things, threatened them, wept and cried...but nothing has changed.
One submitter traced these concerns much further back:
“The issue which has swept down the centuries and which will
have to be fought sooner or later is the people versus the banks”; Lord Acton
Early reviews of banking competition
Before the 1937 Royal Commission, there were at least three
parliamentary committees which inquired into the banking system. As one witness
All the inquiries we have had, going back to the New South
Wales upper house inquiry into monetary confusion in the 1840s, have talked
about introducing new players and stimulating competition—and so did the
Campbell and Wallis inquiries.
The Tasmanian Parliament appointed a select committee in 1934 to review
the financial system in that state. Influenced by the theories of the Douglas
Social Credit movement it was critical of the 'monopoly of finance as
represented by the private banks and their subsidiaries'.
The 1937 Royal Commission
The Royal Commission into the Monetary and Banking Systems in Australia
(1935-1937) arose from concerns that the banking system had exacerbated the
depressions of the 1890s and early 1930s. At the 1935 election the Country Party
(and the Labor Party) had promised an inquiry and when the conservative
government led by Joseph Lyons was forced to form a coalition with the Country
Party, he agreed to establish an inquiry.
The Commission was chaired by Justice John Napier and among its members
was future treasurer and prime minister Ben Chifley.
The Commission held 105 public sessions and heard from 200 witnesses.
The Royal Commission concluded the best system would be one:
...in which trading banks and other financial institutions are
integral parts of the system, with a central bank which regulates the volume of
credit and currency.
It recommended stricter controls – both of a direct and indirect nature
– over the monetary and banking systems of Australia. Many such controls were
introduced as temporary wartime measures, and then made permanent by Mr Chifley
in the Banking Act 1945.
The Commission also suggested that banking licences be issued and only
those organisations possessing one should be able to style themselves as
The Commission remarked on the essential role played by banks and the
subsequent obligations this involved:
Under modern industrial conditions practically no branch of
industry can be carried on without adequate supplies of bank credit...therefore,
these banks should be regarded as enjoying a privileged position which closely
resembles that of a public utility.
The Commission noted the lack of adequate disclosure of profits and the
lack of comparability in reported results, and made recommendations to address
The lack of good information impeded the Commission in reaching conclusions
about bank profitability but it opined that the banks:
...are entitled to a fair return for the services which they
render...If these [profits] are found to exceed what may be regarded as a fair
return for the services rendered, the Government should consider whether the
profits of the trading banks should be regulated or limited as in the case of
some public utilities.
Perhaps because at the time there were ten major banks rather than four,
competition was not a major focus:
So far as they have gone, amalgamations do not appear to have
lessened the competition between trading banks, which, as we have already
pointed out, is in some measure restricted.
The Commission supported the Commonwealth Bank continuing as a
competitor with the trading banks.
The Commission's report was initially well–received, with The
Economist comparing it favourably to similar investigations in Britain,
Canada and New Zealand.
But growing opposition from the private banks prevented the Lyons Government
implementing its recommendations.
For those nostalgic for a more regulated financial system, the
The last inquiry to offer decent insight into the financial
sector in Australia...
A broad-ranging inquiry into the Australian economy in 1965 recommended
a review of the credit system noting the marked changes in the monetary field
since the Royal Commission, but as with most recommendations in the Vernon
Report, no action was taken.
It was not until 1979 that there was another comprehensive review.
The Committee of Inquiry into the Australian Financial System
(1979-1981) arose from a government promise to hold an inquiry into capital
markets, which was widened to cover the whole financial system.
Associate Professor Cornish summarised the Campbell Committee report as
...explain how the regulatory system had broken down. The world
had changed. If the monetary authorities were to succeed in combating current
problems of which inflation was the major one then new systems of operation had
to be implemented. The report’s principal recommendation included the
deregulation of bank interest rates; the introduction of tender systems for the
marketing of government debt; and a managed float of the Australian dollar, not
a free float. Some of these reforms were underway before the Campbell Committee
The reforms arising from the Campbell Committee allowed the Reserve Bank
to formulate the cash rate system, which is now the major operational
instrument for conducting monetary policy in Australia.
For Mr Cornish, the Campbell Committee report is the most impressive of
the five. A contrary view was presented by Dr Evan Jones:
... the stellar reputation of the Campbell Report is
Dr Jones argues that the inquiry started from a view that deregulation
was desirable and interpreted all evidence in this light. Dr Jones claims this
led to undesirable recommendations:
The Campbell report bequeathed us abolition of specialist
(including government-owned) institutions, market-based banking regulation
(generally confined to hands-off prudential regulation), and market-based
monetary policy (generally confined to manipulation of the cash rate). The abolition
of specialist institutions has been a significant mistake...The over‑dependence
on prudential regulation has produced failings – lack of control over credit
excesses (indeed contributing to it by the discounting of capital requirements
on residential mortgage lending), lack of control over bank tendencies to
illiquidity; lack of control over off-balance sheet manoeuvrings – but the
attraction to the system (not least because of Basel‑based global
legitimation) remains undiminished. The ludicrous overdependence on the single
short term cash rate instrument has produced manifest failings – a fundamental
enhancing of boom and bust...
The Campbell Committee emphasised free entry (or 'contestability' in the
jargon) as the key to competition :
As argued throughout this Report, any competitive
deficiencies will generally be short-lived so long as there is effective
freedom of entry...the mere threat of new entry will act as a strong
incentive for established firms to remain efficient and competitive.
It did, however, call for the Reserve Bank to be accorded a watchdog
...the committee recommends that the Reserve Bank should
undertake regular reviews of the overall functioning of the financial system,
in the context of which it should diagnose and report on any structural
problems that appear to exist and any barriers to effective competition,
especially government-induced barriers.
The Campbell Committee noted concerns about concentration in the
banking industry and observed:
While exactly comparable figures from other countries are not
available, levels of concentration in Australia appear to be at the upper end
of the spectrum by world standards – at least in respect of banking.
The only response it regarded as appropriate, however, was:
...the use of the Trade Practices Act to prevent an
individual institution from acquiring a dominant position in the market and, in
the process, substantially lessening competition.
Vic Martin Review Group
The Australian Financial System Review Group (1983-1984) was
commissioned by the Hawke Government soon after its election, essentially to
review the Campbell Committee's recommendations in light of the incoming
government's economic and social priorities. The Group was chaired by Vic
Martin, the chair of the MLC insurance group, and also included Treasury and
Reserve Bank officials and an academic.
Given the extensive recent consultation by the Campbell Committee, and its
short timeframe, the Group decided against inviting public submissions or
The Group concluded:
Market-oriented policy...is seen as having considerable
advantages for monetary policy purposes...the Group does not consider controls
over bank interest rates as appropriate for either monetary policy or
It supported competition in banking:
Competition provides incentives for firms to produce at
minimum cost, to price in accordance with the cost of production, and to
respond to changing community needs by innovating in product design, extending
product variety and so on.
The Group noted that mergers had led to the creation of four large
banks, although at this time there were also a number of state-owned and
Nonetheless the Group opined:
...the oligopolistic structure of the industry and its regulated
nature suggest that policies to enhance competition would benefit the
As well as regulatory barriers the Group identified as a barrier to
...the perceived difficulty of competing with the established
banks, which have a substantial (albeit declining) base of non-interest-bearing
deposits and strong ties with established customers.
It supported the entry of foreign banks (with some limitations) but
wanted to keep banks distinct from other intermediaries:
The Group supports, as a general principle, the continuation
of a basic distinction between banks and non-bank financial institutions...It
reflects the view that undoubted confidence in banks is crucial to a
well-functioning and stable financial system.
Mr Cornish characterised the Group as:
...a follow-up to the Campbell committee...Prime Minister Hawke
and Treasurer Keating commissioned a small group...to investigate the Campbell
Committee’s recommendation in the light of the new government’s social and
political priorities. The Martin Group gave the major Campbell Committee
recommendations a big tick,..
Dr Jones regards it as having:
...effectively facilitated the Hawke Labor Government ‘taking
ownership’ of the Campbell report agenda.
Stephen Martin Committee
The House of Representatives Standing Committee on Finance and Public
Administration was referred an inquiry into banking and deregulation
(1990-1991). The inquiry was established to assess the consequences of the
financial deregulation that had ensued after the Campbell Committee's report.
Its report, A Pocketful of Change: Banking and Deregulation,
found that Australian banks were highly profitable by international standards.
Deregulation had led to narrower interest margins overall but it appeared
business was gaining more benefit than were consumers.
Cross-subsidies were being unwound as 'user pays' became more prevalent.
The Committee concluded concerning the impact of deregulation on
...the four major banks have retained their market share and,
accordingly, their dominant position in the industry; at the regional level,
vigorous competition for market share is provided by locally based State banks,
regionally operating banks and non-bank financial intermediaries; and foreign
banks have had limited impact...
The Committee warned that:
The concerns which exist among various sections of the
community about the trend towards increased concentration in the banking
industry are shared by the Committee. There are dangers that increased concentration,
by reducing the number and influence of competitors, ultimately could affect
the level of industry efficiency, as the incumbent banks would be under less
pressure to generate improved performances. Equally, there is greater
likelihood of collusive or anti-competitive practices emerging, with consumers
having less opportunity to move their business to alternative institutions.
Clearly, such outcomes would be counter to the aims of financial deregulation.
Accordingly, the Committee recommended:
...the Treasurer, in considering proposals for mergers or
acquisitions in the banking industry, refer to the Trade Practices Commission
for determination the question of whether the proposed merger or acquisition
would substantially lessen competition in a substantial market, and whether
there are any public benefits which would outweigh the detriment from the
substantial lessening of competition.
While the Committee was broadly supportive of the impetus to competition
from deregulation, it acknowledged that banks had made some mistakes in
handling the transition to a deregulated market. Access to the payments system
was identified as a remaining barrier to competition.
The long-standing reputations and extensive branch networks of the four major
banks were seen as a barrier to entry for potential competitors in the retail
Dr Jones gives the report mixed reviews:
The [Stephen] Martin report did desirably concern itself with
banking concentration (Ch.6), noting that the deregulation years had brought
the Big 4 to market dominance. The Committee declined to succumb to the
industry’s siren song that competition was raging; indeed, it presciently
raised the concern that things might be getting worse, with the threat of
‘group dominance’ of the entire finance system because of the latter day
appearance of ‘financial conglomerates’...Concerns for increasing concentration
and lessening competition apart, the weighty Martin report was a fizzer.
The Committee itself assessed how its recommendations had progressed a
year after the report in a review called Checking the Changes
(illustrating an advantage of an inquiry being done by a body with an ongoing
existence.) This noted that the government had 'responded quickly' with some of
the recommendations on foreign bank entry, supervisory arrangements and
payments system matters implemented within three months.
A few months later the government agreed to the recommendation that a
'substantial lessening of competition' test be applied to mergers.
The Committee was given a continuing role in reviewing the banking industry.
The review itself concentrated on those recommendations directed to the
...most banks have made genuine efforts to implement specific
recommendations and to respond to the general tenor of the Banking Report.
The Financial System Inquiry (1996-1997) was established soon after the
Howard Government took office, fulfilling a promise to examine the consequences
of financial deregulation.
It set out an underlying philosophy:
Free and competitive markets can produce an efficient
allocation of resources and provide a strong foundation for economic growth and
These philosophical underpinnings for the Wallis Committee have been
As Professor Harper, who was on the Wallis inquiry, has said,
they were based on the assumption that the financial markets were efficient.
The Wallis Committee commented on the role of competitors to the four
Regional banks have been an increasingly important
competitive force in recent years. In particular, along with credit unions and
building societies, they have led the way on service, innovation and pricing on
some products...However, there is nothing immutable about the present position
of regional banks.
Notwithstanding this recognition of both the positive role and
vulnerability of these competitors, the Wallis Committee's recommendations
envisaged a reduction in controls on mergers:
The Trade Practices Act should provide the only
competition regulation of financial system mergers...The 'six pillars' policy –
which separately imposes a government prohibition on mergers among the largest
four banks and the largest life companies – should be removed.
As with earlier inquiries the payment system was identified as an area
Access to clearing systems should be widened to include all
institutions fulfilling objective criteria set by the regulator.
The Wallis Committee recommended creation of a separate prudential
regulator for all deposit-accepting institutions, including the insurance and
superannuation industries. These recommendations on supervision, realised in
the creation of the Australian Prudential Regulation Authority, were lauded by
At least the Wallis Inquiry appears to have achieved
something beneficial in the national interest. It is reported that the
government of the day overwhelmingly adopted his report and established APRA...It
is likely that without APRA and its regulatory framework the Australian economy
may not have emerged as unscathed from the GFC.
Again, Dr Jones is less enthusiastic about the report:
...its untarnished reputation is undeserved. Its views on
competition are insipid...It kowtows to the contemporary prestige of
Recent parliamentary inquiries
There have been a number of inquiries by parliamentary committees into
aspects of competition in banking in recent years. Disappointingly, there have
been no formal government responses to them.
Home loan lending (2007)
A House of Representatives committee examined home loan lending
practices. It noted how the entry of new players into the home loan market and
an increased preference for residential lending among existing financial
intermediaries had led to a reduction in interest margins but also a loosening
in credit standards which had led to an increase in mortgage defaults. The
committee recommended that:
..the Commonwealth Government regulate credit products and
advice. This includes the regulation of mortgage brokers and non-bank lenders.
Competition in banking and
Perhaps the inquiry most similar to this one is that by this committee's
sister committee in the House. While the global financial crisis was still
raging they reviewed the state of competition in the banking market and options
to improve it. Their report observes:
The non-banking sector, which has primarily relied on
securitisation as a means of funding, has been the hardest hit and, as noted
above, there has definitely been a reduction in the amount of providers and
products in the mortgage market.
Looking forward, their prediction was that:
Increased levels of competition will return, but with the
current financial climate groups are uncertain of how long it will take and
whether it will be as effective as it was prior to 2007.
A proposal to create a government-guaranteed 'AussieMac', based on the
Canada Mortgage and Housing Corporation, to support the residential mortgage
securitisation market was evaluated. The conclusion was that the:
...proposal is not a suitable model for the Australian context.
On competition law, the conclusion was:
Both the ACCC and ASIC are constrained by their respective
Acts which do not provide them with the power to independently investigate and
report on issues of concern that relate to competition within the marketplace.
Positive credit reporting was seen as helping smaller lenders compete
with the major banks and the committee recommended:
The committee supports the findings of the Australian Law
Reform Commission's report and urges the government to implement the report's
recommendations on reforming Australia's credit reporting system.
Account switching was another focus and the committee noted that the
switching rate for transaction accounts in Australia was below that in Europe.
The committee noted the switching package introduced by the Government in
November 2008 and recommended that the Government consider including card
schemes in the package.
They further recommended that:
...after 12 months in operation, the Treasury review the
Account Switching Package with consideration being given to any areas in which
it may be enhanced, including consideration of the costs and benefits of a more
centralised account switching system, such as those in operation in the UK and
A lengthy discussion of the impact of exit fees on competition was
The committee is uncertain whether there is a definite,
across the board, negative impact on competition caused by the imposition of
entry and exit fees on mortgage products...The Committee recommends that...the
government consider mechanisms for making entry and exit fees more transparent
and for addressing unfair entry and exit fees.
The importance of improved financial literacy was recognised:
The committee recommends that the Australian Securities and
Investments Commission includes a glossary of standardised financial terms in
simple language on its consumer website and also on the Financial Literacy
Foundation's website. 
Bank mergers (2009)
This committee examined bank mergers in an earlier inquiry. A focus of the
recommendations was improving the provision of information:
The Committee recommends that the ACCC increase the
transparency of their merger inquiries by publishing commissioned research and
submissions unless the submitter explicitly asks that they be confidential...The
Committee recommends that the Government request the ACCC, APRA and the Reserve
Bank to provide a joint annual report to parliament on competition in the
retail banking market in Australia, and the provision of affordable banking
facilities to those on low incomes, but taking care not to increase unduly the
reporting burden on financial institutions.
It also was concerned about further increases in concentration in the
The Committee recommends that the Government retain the 'four
pillars' policy of not allowing a merger between any of the four major
banks...The Committee regards it as reasonable for the Treasurer to impose
conditions on banks before approving a merger. Once conditions are imposed,
there should be independent verification and appropriate penalties if the bank
is not complying.
Government funding guarantees
This committee examined the Government's two schemes to provide
guarantees for bank deposits and other funding introduced in October 2008. (The
schemes are discussed further in Chapter 12.) The Committee recommended changes
to the premia charged for the scheme:
The Committee recommends that, in view of the experience of
markets not pricing all guaranteed debt identically, the Government review the
need to apply differential premia for ADIs with different ratings for the
wholesale funding guarantee (and hence also that applying to deposits over
Recognising the problems in the securitisation market, the Committee
...the Government introduce an appropriately designed guarantee
scheme for residential mortgage-backed securities.
Foreshadowing some of the issues faced in this inquiry, the Committee
During financial crises, the balance of concern tends to move
from competition towards solvency. One manifestation of this is that the
authorities tend to be more likely to allow mergers. The Committee regards it
is appropriate for greater weight to be given to solvency concerns in a crisis.
But a fine judgment is required as to how much the emphasis should shift, as it
may be hard to revive competition once the crisis has passed.
Bank accountability (2009)
The Senate Economics Legislation Committee examined a bill that would
require a bank to explain to the Treasurer if it had moved interest rates
contrary to movements in official interest rates and if the Treasurer regards
the move as contrary to the public interest empower him to revoke the guarantee
of the bank's deposits under the Financial Guarantee Scheme.
The Committee recommended against the bill as:
... it is concerned that the bill may discourage banks from
competing in reducing interest rates, could lead to higher bank fees and/or
reduced lending to homebuyers, could raise doubts about the deposit guarantees
and so reduce confidence in the safety of bank deposits and could be perceived
as politicising the setting of bank interest rates.
Instead it argued for better disclosure of information around the cost
The Committee recommends that the Reserve Bank and the
Australian Prudential Regulation Authority regularly publish estimates of the
costs of funds for the banking sector as a whole and bank interest margins.
Access of Small Business to Finance
The Committee examined the availability of finance for small business.
(This topic is discussed further in Chapter 6.) It reiterated earlier concerns
about concentration in banking, recommending:
...the Government retain the 'four pillars' policy of not
allowing a merger between any of the four major banks...a moratorium be placed on
approval of any further takeovers in the banking industry for one year, unless
the bank being taken over is at imminent risk of failure...the Trade Practices
Act be amended to inhibit firms achieving market power through takeovers or
abusing market power and that 'market power' be expressly defined so that it is
less than market dominance and does not require a firm to have unfettered power
to set prices. A specific market share, such as, for example, one third (set
based on international practice), could be presumed to confer market power
unless there is strong evidence to the contrary.
It viewed increasing competition as preferable to other suggestions for
improving access by small business:
The Committee notes the suggestion of a development bank but
prefers to increase competition within the existing commercial banks...The
Committee notes the suggestion of a guarantee for loans to small business but
prefers to increase competition within the commercial banks rather than for a
government entity to assume the risk.
Access for Small and Medium
Business to Finance (2011)
The Joint Committee on Corporations and Financial Services revisited the
issue of the availability of finance in early 2011. Its main suggestion for
improving competition was to strengthen the mutual sector and it recommended
the government explore further means of doing this. It also recommended that
minimum notice periods for adverse changes in terms and conditions of small
business loans be added to the relevant codes of practice.
Calls for future banking inquiries
There have been some suggestions that in addition to this inquiry into competition
in banking, there needs to be a broader inquiry into other aspects of the
financial system. As Associate Professor Cornish notes, the five banking
inquiries discussed above followed the depressions or recessions of the 1930s,
1970s, 1980s and 1990s, so:
...it is not surprising that, following the Global Financial
Crisis or Great Recession of 2007/09, calls have been made for a new inquiry;
similar calls for inquiries have been made in other countries.
A number of submitters and witnesses, particularly academics, made such
Following the lessons that have been learned during the
global financial crisis, and the 12 years that have elapsed since the last such
exercise, we believe that a broad-based inquiry into the integrity of
Australia’s financial system is now warranted.
...there are strong arguments for there to be regular inquiries
into the financial system, similar to the Campbell, Martin and Wallis
Recommendation: Call a new enquiry to identify fundamental
areas of concern in the wider banking industry – in particular, bank products
and ways to regulate these products.
A complete and independent review of the Australian banking
sector by the Productivity Commission is recommended.
A Royal Commission into the Banking sector is inevitable as
there will be so many more vulnerable people losing their homes in the
...what we probably need—looking at the terms of reference of
your own committee—is a review that is broader than just thinking about
competition. It is really thinking about our financial regulations...
A survey of businesses in Queensland found that over 70 per cent
supported a full review of the financial system.
There were some in the banking community who supported a review but
thought now was not the most propitious time:
...although we support in principle the concept that regular
reviews of the financial system are warranted, we believe that in all the
circumstances currently before us, it would be appropriate to conduct such a
wide-ranging inquiry when major international and domestic regulatory change
has settled down over the next three to four years.
Others thought it would be a mistake to wait for a 'more settled' time:
I suspect it is going to be a long time before, for example,
the sovereign debt crisis and the various adjustments in Europe play out. There
is no guarantee that that resolution will come before the next financial
crisis....the likelihood is that we are not going to get a period of calm much
better than the current one without running into the risk that we could see a
severe financial shock. For example, a downturn in China, a collapse in the
housing prices here or a number of factors could expose our system to severe
Some submitters saw an additional inquiry as unnecessary:
...the FSU does not champion the notion that there is a need
for a "son of Wallis" type inquiry...Rather, efforts ought to be made
to implement the outcomes/recommendations from recent parliamentary reviews
into the banking sector.
Yet other witnesses were agnostic:
I am not here to advocate another major inquiry into the
Australian financial system at this time, nor am I saying that there should not
be another inquiry.
Whether or not we require a further inquiry I think depends
very much on the findings of this committee...
The Committee heard calls for decennial reviews of the banking system:
I also recommend, and have done ever since I worked with the
Campbell committee in the early eighties, that there be regular and independent
inquiries into the financial services industry. We had an understanding then,
which was continued into the Wallis committee, that there would be a review
every 10 years. It is now 14 years since the Wallis committee. Consequently, I
think it is probably time for another such review.
The Wallis Report titled its overview section "Towards 2010",
suggesting another review is due by now to chart the future direction.
Regular inquiries are the pattern in some other countries:
In Canada, for example, it is well established now that they
have a comprehensive review of the financial system every 10 years.
On the possible focus of such an inquiry, Associate Professor Cornish
New methods and techniques of operation in the financial
services industry were introduced over the preceding twenty years and some of
them contributed no doubt to the recent financial and economic collapses around
the world. The financial crisis itself has revealed weaknesses in regulatory
procedures in some of the world’s preeminent financial centres, and there have
been deficiencies in the way that some of these countries have conducted their
monetary and financial policies.
The Stephen Martin Committee identified a cyclical pattern in both bank
behaviour and public inquiries:
The people have also looked to governments to rein in the
excesses of banks. Banks have been prone to overreact in both booms and busts.
Imprudent lending fuelled the speculative mania of both the 1880s and the
1980s. Excessive contraction of credit worsened the slumps of the 1890s and
1930s. Many believe this pattern is repeating itself in the early 1990s. In
many cases, changes in government controls over the financial system followed
major public inquiries...Other steps include regulation. This has moved in a
Some submitters requested further inquiries into specific aspects of
competition in banking:
In addition to this Senate inquiry process, the Government
should commission the Productivity Commission to conduct an inquiry into
examining the degree of competition in the provision of business finance. The
study should examine:
1. The impact of an
increasing/decreasing number of participants in lending markets;
2. The implication of repricing
of risk to businesses;
3. The changes that have
occurred in the cost and availability of finance to business, especially
smaller enterprises, over time; and
4. International experiences in
encouraging banking competition and their advantages and disadvantages if
applied in Australia.
Master Builders recommends that
the Productivity Commission conduct an independent inquiry into the banking
system to improve competition within the Australian banking system.
At the risk of raising yet
another inquiry, I think we need a far more fact based view on the sources of
competitive advantage in banking. I think the merits of maintaining the current
biases towards major bank regulations needs independent analysis.
After the Committee had concluded its hearings, it emerged that Treasury
was also an advocate of a broader inquiry into the financial system. In its
'Red Book' briefing to the re-elected government, released under Freedom of
Information in March 2011, Treasury referred to:
...initiating a comprehensive financial sector review in order
to take stock of the lessons of the financial crisis and draw together the work
currently being undertaken both here and internationally....Australia has not
undertaken a comparable review since 1997 and we strongly urge you to make this
a key priority in your second term... There is merit in establishing an inquiry
that draws together the existing work streams and considers broader, more
systemic issues. This includes considering the lessons from the GFC and the
balance between the dual objects of stability and safety, and competition and
efficiency. The best time for such an inquiry to commence is once markets have
stabilised and G20 outcomes have become clear.
The Committee recommends that a broad ranging inquiry into the
Australian financial system be established, modelled on that conducted by the
Campbell Committee. The terms of reference should be broad, covering the role
of banks and other financial institutions in a post-GFC financial environment. The
inquiry should be well resourced and have its own secretariat, independent of
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