The financial system of Australia consists of investment banks, commercial banking institutions, and various financial intermediaries. The Australian Prudential Regulation Authority functions as the regulatory body empowered to authorize companies conducting banking business. Entities approved by the regulator are known as autorized deposit-taking institutions. The regulation authority may also require that companies hold a financial services license issued in Australia.
The origins of the banking sector in the country date back to the beginning of the 20th century, with private banks operating in this remote land even in the 19th century. However, centralized banking in Australia developed after 1901. It was in 1911 when the federal government of Australia founded the Commonwealth Bank, which was authorized to issue notes backed by the economic resources of the country.
Another milestone in the development of the banking system goes back to 1960, as the powers of the Commonwealth Bank were assumed by the Reserve Bank. This step became necessary as by that time, the Commonwealth Bank, a state-owned but commercially-operated financial institution, had become a threat to some of the emerging banks in the country. It is interesting to mention that foreign banks were not allowed to enter the banking market in Australia until the 1980s. Until then, banking in Australia was strictly state-controlled and therefore safe, but it was also terribly awkward and inflexible. Thus, the country entered the 1990s with a small number of banks, compared to some bustling banking markets such as Hong Kong. Banking institutions fell in two main categories: savings banks and trading banks. Strange as it may sound now, but the entities in the former category brought almost no interest to their customers. Their lending policy was rather rudimentary, as it was restricted to just providing mortgage loans. As it is suggested by their name, the main function of the trading banks was to facilitate Australia’s foreign trade, and their services were therefore inaccessible to the general public.
With such a tightly regulated banking sector, it is not a wonder that Australians had little access to consumer loans throughout the 1990s and mainly through financial institutions such as the Building Society and the Australian Credit Union. During this period, the most common way to establish a credit score was to buy different goods and items in equal monthly installments. More often than not, these “sub-prime” lenders would charge high interest on their loans, but this was the price that Australians had to pay for building up a credit history.
Today, the banking sector in Australia is a paragon of financial stability and security. Moreover, not a single Australian bank has gone bankrupt for the past decade or two, neither has the government had to bail out an Australian bank with taxpayers’ money. There are four major banks in Australia: Australia and New Zealand Banking Group, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation – all of them being among Asia’s top ten most profitable banks. Banking institutions operating in the country provide all services found in the industrialized countries: securities underwriting and placement as well as short-term wholesale finance. Some of the specialized banks offer assistance in areas such as industry and resource development. Foreign banks may operate in Australia through authorized branches or authorized and locally incorporated subsidiaries. Branches of foreign banks are not allowed to engage in retail banking while subsidiaries offer the full range of banking services.
Finally, it is worth mentioning that according to Standard & Poor’s, one of the best-reputed crediting agencies in the world, Australia has the most stable banking sector in the Asia-Pacific region.