Australian Banking Industry and the Role of Government Regulation

Document Type:Essay

Subject Area:Economics

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gov. au (2016) the four banks have a collective extensive market share in diverse deposit as well as loan oriented products. The four players also have an unrestricted pricing power that has enabled them maintain eighty percent of the market for mortgage based products while realizing continuous increase in profits despite introduction of tough capital rules by regulators as illustrated in figure 1. The banks have also used their unfettered pricing capability after the global financial crisis for increasing variable housing rates in a bid of offsetting structural pressures associated with NIM/ROE. Therefore the mentioned market structure is an oligopoly since few interdependent companies will engage in competition while creating natural and legal barriers making it difficult for new entrants. The companies in an oligopoly are interdependent in setting up prices. Sushko et al. argue that the conglomerates may form cartels that decide to have a fixed price, output as well as limit the output or even to increase the prices. Competition in an oligopoly may result in the formation of a collusive market structure as big business entities may dominate the market and conduct collusive practices in a bid to reduce uncertainty. Roux et al. adds that the formation of cartels is considered as illegal in various countries. The big banks therefore are the pace setters as far as pricing, changing of interest rates as well as charging additional fees is concerned. Figure 1. An Illustration of Major Banks Dominating Lending and Deposits (Treasury. gov. au 2016) Figure 2. Price-Fixing and Cartels in an Oligopoly Setting (Roux et al.

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Figure 2 shows the price fixing cartel in collusive oligopoly. An insight into figure 2 shows that a collusive oligopolistic structure fosters the reduction of uncertainty in a market. Roux et al. Inherently it also leads to an increase in the competitive behavior in the markets the overall result being an in increased willingness in the provision of credit within a community setting (Battellino, 2007). Some of the measures that have been integrated and geared at protecting the consumers include non-engaging in risky products such as giving loans to clients with incomes that are not stable. In addition the other measure is refusing to offer clients loans especially those with high credit risk rating. Therefore an insight into risky products as well as establishing of ethics results in increased consumer protection (Colebatch, 2009). Why the Australian Banks were almost untouched by the Great Financial Crisis of 2008 Brown and Davis (2010) argue that the government had a significant role to play by supporting the banks at the time.

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Rise of the Banking Industry from 1990s to Date There are macroeconomic factors that have contributed to their growth. According to Richardson (2012) the big four banks did not grow as much as they have in 2018 as compared to previous years. For instance their market dominance combined was below seventy five percent in home based loans in the 1990s. Richard (2012) argues that the reason is due to the influence from the international lenders in Australia. The role of the non-bank lending institutions at the time regulated the market dominance of the four largest banks in Australia. Individuals supporting its incorporation argue that it aids in the promotion of ethics in the banking industry while those opposed to it implore that the Royal Commission interferes with the flexibility of the banks in the 21st century.

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The Royal Commission propagates the enforcement of policies associated with refunding clients that have been affected by financial institutions due to the institution’s misconduct (Royal Commission, 2018). The royal commission’s core objective is to look into misconduct in the financial sector such as questionable behaviors associated with misappropriation of funds concerning people’s retirement savings. The commission is non-discriminative and looks at the credibility of departments as well as the managers such as those of Australia’s biggest banks as well as those heading small financial institutions. Therefore the role of the Royal Commission is conducting comprehensive evaluations into the financially oriented institutions. References: Battellino, R. Australia's Experience with Financial Deregulation | Speeches | RBA. Retrieved from https://www. rba. gov.  Lessons from the financial crisis: Causes, consequences, and our economic future, 537-544.

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Colebatch, T. How Australia avoided the global financial meltdown (touch wood). Retrieved from https://www. smh. pdf Financial Counselling Australia.  Rank the Banks [Ebook] (pp. Melbourne Australia: Financial Counselling Australia. Retrieved from https://www. financialcounsellingaustralia. Yu, M. Sustainable fashion supply chain management under oligopolistic competition and brand differentiation.  International Journal of Production Economics, 135(2), 532-540. Richardson, D. The Rise and Rise of the Big Banks. Journal of Economic Behavior & Organization, 116, pp. Royal Commission. Financial Services Royal Commission - Home. Retrieved from https://financialservices. royalcommission. Cajueiro, D. O. The relationship between banking market competition and risk-taking: Do size and capitalization matter?.  Journal of Banking & Finance, 36(12), 3366-3381. Timesofindia-economictimes.

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