Australia Banking

tHe timesthat shaped the people

62 The magazine for Finsia members / october 2011 v.125 n.4

1800s Gold, gold, gold.

1817AustrAliA’s First BAnk

1850+Gold rush

1886FormAtion oF the BAnkers’ institute oF AustrAlAsiA

1888the BAnk oF AustrAlAsiA employs the First FemAle typist

1893the BAnk smAsh

The gold rush was an important catalyst for the development of Australia’s banking sector.

FAIRFAX SYNDICATION

The magazine for Finsia members / october 2011 v.125 n.4 63


“ At the height of the gold rush there were around 130 banks in Australia.”

The Black Hill Mine in Ballarat. FAIRFAX SYNDICATION

emerGenCe of tHe AuSTRALIAN fINANCIAL SERVICES INDuSTRyGENESIS oF thE AuStrAlIAN bANkING SECtor The foundations of the Australian financial services sector were laid in the early days of the colony. In 1817 Governor Macquarie became concerned about the lack of fiscal discipline in the settlement and issued a charter – which he didn’t by rights have the power to create – to a group of citizens to form Australia’s first bank. This created the Bank of New South Wales, which is where Westpac has its roots. Its purpose was to issue banknotes, the fledgling nation’s first official currency.

But it wasn’t until the 1850s when the gold rush gathered pace that the banking sector started to develop in any real way. At the height of the gold rush there were around 130 banks in Australia – although some of these were really just set up to buy gold and didn’t accept cash deposits or perform normal transactional banking. When the famous Welcome Stranger nugget was found it was taken to the Dunolly, Victoria branch of the London Chartered Bank.❚


1890s bANk SMASh Between 1891 and 1893, only a few short years after the Bankers’ Institute of Australasia was set up, Australia experienced a catastrophic banking crisis, when a total of 41 financial institutions collapsed or were suspended.

What’s so intriguing about the crisis, known as the ‘bank smash’ of 1893, is that its long-term consequences helped shape today’s banking system.

The genesis of the crisis was in the real economy; before 1893 Australia experienced a heady economic boom.

During the boom the banks had lent easy money, accessed largely from Britain, to speculative land and finance companies, many of which had invested the money in the stock market and in non-income producing land. When the boom ended, these companies couldn’t pay back their loans, which was the start of the banks’ problems.

As the economy began a slow slide south, at first there was only a trickle of banks that collapsed. But when the Federal Bank failed in January 1893 and the activities of the Commercial Bank of Australia (the bank over which the institute’s first president, Henry Gyles Turner, presided) were suspended in April of the same year, the public started to panic, prompting a run on the bulk of the banks in Victoria and New South Wales. At the same time, there was panic selling on share markets.

Although the crisis had its roots in the real economy, the lack of bank regulations and prudential standards exacerbated the problem. Almost anyone could found a bank and, although Colonial Bank Regulations existed, they were not enforced and there were few real restrictions around how much capital a bank had to hold and, importantly, no central bank. In effect, the financial system was unregulated.

When the crisis erupted, the Victorian treasurer tried to force the stronger banks to bail out their weaker peers, without success. But government intervention played an essential part in restoring, and at the same time undermining, confidence in the banking system.

To restore confidence in the banking system, the New South Wales and Victorian governments allowed banks whose activities had been suspended – including the Commercial Bank of Australia – to restructure their operations. This step made it difficult for deposit holders to liquidate their assets, which helped stop the run on the banks.

During the crisis the three biggest banks, (The Bank of Australasia, The Bank of New South Wales and the Union Bank), did not fail, which scholars believe is because their bank notes were proclaimed by the New South Wales and Victorian governments as a first charge on assets, as well as legal tender (with no central bank at the time, banks issued their own notes) and because they operated outside Victoria, the state most severely impacted by the crisis. The banks whose notes were declared legal tender could print notes to meet their obligations, which effectively safeguarded deposits. At the same time, the New South Wales government agreed to meet 50 per cent of amounts owed to customers by the suspended banks and declared that no New South Wales bank would be allowed to fail.

Following the crisis there were calls for increased banking regulation, but no actions were taken, possibly because federation was imminent.❚

“ The Victorian treasurer tried to force the stronger banks to bail out their weaker peers.”


When the Bankers’ Institute of Australasia was founded, Australia was nearing the end of a period of prolonged financial prosperity as a result of the gold rush and global demand for our quality wool.

As the economic boom gathered pace, banks in the Antipodes grew in tandem. As an editorial in the 8 October 1879 edition of The Australasian Insurance and Banking Record notes “the assets under the control of our banking institutions exceed £80 million sterling. This vast responsibility is far in excess of that of a few years ago, and will be greatly exceeded in a few years hence…”

There was a recognition that the size and scale of the assets under the banks’ control required, to quote the same editorial, “the most enlightened skill in its administration.” It was this feeling that led those in a position of power in the banking industry to advocate the creation of an industry association so that “the men for the future work should be trained to a higher standard than is now attended.”

Throughout the mid-1880s there was a vigorous debate in the letters pages of the Record about the formation of a banking institute, as the following excerpt from a letter signed “Ex Branch Manager” demonstrates:

“How is it that bank clerks have not the means of having the practice of their calling explained to them, like those engaged in other pursuits … How many clerks are there who would, if inducement were offered to them, study banking and make it in their own case a profession? The time is fast approaching when this consideration of the administration of banking must be earnestly paid by the directors of our banking companies … Unless they do so, they will find their operations suspended, through having a class of officers who are not, by education and commercial intelligence, able to occupy the responsible positions in their power to bestow.”

The debate gathered momentum and, on 21 July 1886, 250 bankers attended the first meeting of the Bankers’ Institute of Australasia.

The institute was charged with “dissemination of knowledge on the theory and practice of banking, finance and other subjects”, “the promotion of the professional status of those employed in the industry” and “the encouragement of good feeling and fellowship amongst members.”

The institute’s first headquarters were at the then-new City of Melbourne Bank building, on the southeast corner of Collins and Elizabeth Street. The building housed a library and reading room that was open to members from 7.00 am to 8.30 pm every day except Sunday and public holidays.

In September 1886, the first issue of the institute’s journal was published, with early issues mainly featuring excerpts of papers presented at institute meetings. But the magazine, which changed its name to The Bankers’ Magazine of Australasia in 1891, gradually covered a wider range of topics including those far removed from banking. For example, an August 1891 article advocated the introduction of African antelopes to Australia to develop wild game hunting.

The institute’s first associate examinations were held in 1898 and two candidates applied to sit the exam – although one withdrew beforehand. So the first associate of the institute was Mr G A Tulloh of The Commercial Bank of Australasia, Sydney.

Membership numbers grew steadily in the first years of the institute’s life. There were 690 members by the end of July 1887 and by November 1888 members numbered more than 2000. But following the “bank smash” of the 1890s numbers started to dwindle and didn’t recover until 1913.❚

formAtion of tHe bANKERS’ INSTITuTE of AuSTRALASIA

The Bankers’ Institute of Australasia, reading room Melbourne.


thE FIrSt prESIDENt’S INAuGurAl ADDrESS Henry Gyles Turner’s address as inaugural president of The Bankers’ Institute of Australasia, delivered at the Melbourne Athenaeum on 21 July 1886, makes fascinating reading. What’s so startling is how apt many of his observations, made in 1886, are today.

In the address Turner outlines the key purposes of the institute: “the promotion of good feeling and friendly intercourse amongst its members, the dissemination of professional knowledge and inculcation of sound banking practice by the reading of papers from time to time…”

In the address he wrote of a time in which a spirit that today might be described as ‘irrational exuberance’ pervaded and owing to this, had a vision for the institute to be a true fraternity and civilising influence on the financial markets.

Turner says “I trust you will not think I am slandering my profession if I say that the banking fraternity appears to me eminently to require the cultivation of good feeling and friendly intercourse” and that “owing to the keenness of competition, and the great latitude frequently allowed to young managers in building up a business, practices are resorted to, and overtures are made, the very suggestion of which would…bring a London bank into hopeless disrepute.”

In the address Turner makes it clear that young Australian bankers of the time had real opportunities to progress quickly: “I remember one venerable gentleman in Hoare’s Bank in Fleet Street, who told

me he had been forty-two years in the service before he was promoted to the counter.” But “against this, it is by no means uncommon in Victoria for a smart youngster to get an agency of a small branch after five or six years’ service.”

Turner saw this opportunity for rapid advancement as one of the key reasons why a formal banking institute charged with spearheading professional development was necessary. He writes “no amount of tact, no business smartness, and no personal self-reliance can successfully supply the place of a thorough grounding in the principles as well as the practice of banking.”

Importantly, he also acknowledged an important role of the institute in safeguarding the professional standards of the financial services industry, arming members “against mistakes that have cost many of us both anxiety and losses.”

Turner believed membership of the institute delivered its members real dividends, a sentiment which also holds true today. He wrote that “any man who lays himself out to acquire these qualifications is making an investment which cannot fail to yield him a handsome return.”

But more than that, he saw the financial services industry as more than just the instrument that oils the industrial wheels of the country. Rather, his view was that the financial services industry has a responsibility to take a central role in helping to support society as a whole, writing that “banking is an occupation that will ever play a prominent part in the welfare or otherwise of the community.”❚

“ Many of Turner’s observations still apply today.”

Henry Gyles Turner, founder of The Bankers’ Institute of Australasia.



1901FederAtion

the AustrAliAn notes Act

1907BAsic wAGe estABlished

1910 treAsury tAkes control oF BAnk notes

1915cBA estABlishes wAr loAns

stAte BAnk oF victoriA employs First FemAle BAnk clerks

1900 – 1919 A nation in formation.

The financial services industry’s role in raising loans helped fund the war effort in WWI.

FAIRFAX SYNDICATION


trEASury tAkES CoNtrol oF bANk NotES Until 1910 Australia did not have a single currency, rather private banks issued their own bank notes which citizens could use as legal currency. But in 1910 two laws, the Australian Notes Act and the Bank Notes Tax Act were both passed, effectively handing control of bank notes to the treasurer.

Under the new laws the new government notes were to be convertible into gold and Treasury had to keep gold reserves equivalent to the value of a quarter of the notes on issue up to a total issue value of £7 million, with notes issued in excess of £7 million requiring total backing by gold reserves.

Wanting something uniquely Australian for the newly minted nation’s first currency, in the lead-up to the issue of the first Australian ten shilling note, Treasury asked the public to come up with designs, offering a £50 prize to the winner.

It was stipulated there should be no more than three colours on the note, which also had to have the Australian coat of arms on the front and Australian scenery on the back.

But, not satisfied with the designs the public had concocted, Treasury instead relied on British experts to come up with a suitable design, and also for printing machinery and plate engraving.

Water was as important to the young nation as it is now and the first ten shilling note featured Victoria’s Goulburn Weir, built in the 1880s as a key component of Australia’s first major irrigation scheme.

Other denominations from £1 to £1,000 were produced between 1913 and 1915.❚

tHe firstAuSTRALIAN CuRRENCy

“ New bank notes were to be convertible to gold.”

Before the RBA took over the role of issuing bank notes private banks distributed their own currency.

Images courtesy of the RBA.


“ During WWI the Commonwealth Bank assisted in funding the war effort.”

thE rolE oF thE CoMMoNwEAlth bANk IN AuStrAlIA’S EArly FINANCIAl SyStEM In 1915 the federal government was solely responsible, under the Australian Notes Act 1910, for the issue of currency notes – a function performed by Treasury. But in 1920, the Commonwealth Bank Act was amended and the function of issuing bank notes was transferred to the newly established Notes Issue Board of the Commonwealth Bank. A further amendment in October 1924 to the Commonwealth Bank Act resulted in control of the note issue being transferred to a new Bank Board (some of whose members were members of the old Notes Issue Board).

During World War I the Commonwealth Bank was also entrusted by the federal government with the task of floating and managing loans to the government, an essential task to fund the war. Thanks to the bank’s efforts, ten War Loan and War Savings Certificate Campaigns yielded a total of £257,719,989, a massive amount. The first War Loan was raised in 1915 and a total of £13,389,440 was raised.❚

The first war loan was raised in 1915. Image courtesy of the RBA.


1920 - 1939Boom, bust and the onset of war.

1923loAns council creAted

1929BlAck tuesdAy – wAll street crAsh

1930the GreAt depression

1934the reserve BAnk oF new ZeAlAnd estABlished And issued its First BAnk notes

1939women were Accepted For the First time As memBers oF the AustrAliAn BAnk oFFiciAls’ AssociAtion

The 1929 Wall Street Crash ended a decade of prosperity and signalled the start of the Depression. Australasia’s financial system was completely unprepared to cope with this period of hardship.

FAIRFAX SYNDICATION



rESErvE bANk oF NEw ZEAlAND ForMAlly ApprovED In 1930, after a decade of debate, the decision was taken to set up the Reserve Bank of New Zealand, after British banking expert Otto Niemeyer recommended the creation of a central bank. But it wasn’t until 1934 that the bank opened its doors for the first time.

When it was set up the bank was partly privately owned, and was primarily responsible for stabilising exchange rates. The situation changed dramatically in 1935 when a Labour government came to power and nationalised the bank and at the same time gave it the power to issue loans.

The bank’s powers were gradually extended over the years to encompass roles as the government’s stock registrar and banker, controlling foreign reserves and foreign exchange and as the prudential regulation authority, in addition to its role directing monetary policy.❚

CurrenCy issue And mAnAGement LEADS To THE fouNDATIoN of RbNZ

“ The RBNZ was originally partially privately owned.”

FIrSt NEw ZEAlAND CurrENCy The newly formed Reserve Bank of New Zealand became responsible for issuing and distributing bank notes. It issued its first bank notes in 1934, six months after the bank officially opened.

According to the RBNZ, until 1934 the country’s six trading banks distributed their own bank notes – but they were not obliged to accept each other’s tender.

To effect the transfer of the responsibility for producing bank notes from the trading banks to the Reserve Bank, it issued a cheque to the banks that would roughly equal NZ$2.3 billion in today’s values, at the time one of the biggest cheques ever written in New Zealand.❚

Reserve Bank of New Zealand Board of Directors, 1934-35. Courtesy Reserve Bank of New Zealand.

The first cheque issued by the Reserve Bank of New Zealand. Courtesy Reserve Bank of New Zealand.


blACk tuESDAy wAll StrEEt CrASh Stock markets around the world had enjoyed an extended bull market right through the 1920s, until the situation was dramatically reversed on Black Tuesday, 24 October 1929. Although most major stock markets experienced a catastrophic decline that day, in the US the Dow Jones Industrial Average had actually peaked on 3 September 1929, before losing 17 per cent of its value over the course of the next month. Black Tuesday was only the start of exceedingly troubled times for financial markets. The bear market did not end until July 1932 and the market did not reach the peak seen at its height in the late 1920s until the mid 1950s.

Interestingly, as Graeme Adamson notes in his book A Century of Change: the first hundred years of the stock exchange of Melbourne, the Australian market did not suffer the sharp falls the US market experienced, largely because our market was not characterised by speculative trading as in the US. Nevertheless, following the crash in the US, share prices began to fall in all sectors. The Melbourne stock market experienced a small rally at the end of 1930, but continued to travel south throughout 1931, although there were signs of hope by the end of the year.

By 1934 the Australian economy and the stock market had turned a corner. As Adamson writes, “seldom had the stock exchange opened with a spurt as optimistic as that of the first weeks’ dealing in the new year of 1934.”❚

thE GrEAt DEprESSIoN The Australian financial system was woefully unprepared to cope with the Great Depression of the 1930s. Australia had large amounts of overseas debt and faced considerable pressure not to default on its liabilities. Treasury and the Commonwealth Bank, which then played the role of the central bank, at the time had little influence over the interest rates the private banks could charge. During the early part of the 1930s Australia’s foreign reserves declined, but government costs related to social welfare spiraled out of control. There was intense conflict between the private banks and the government about how – and even whether – to satisfy overseas debt obligations and whether to devalue the currency to help make exports more affordable. Eventually, the states signed what was called the Premiers’ Plan to resolve the stalemate, which involved slashing government spending by 20 per cent, increasing taxation, reducing government interest charges on its debts and giving relief to mortgage holders.❚

A period of TuRbuLENCE“ Australia had large amounts of overseas debts and faced pressure not to default on its obligations.”

Australian banks played a key role providing finance to fund the post-war boom.

FAIRFAX SYNDICATION

1940 - 1959WWII and rebuilding the nation.

1940BAnks’ cApitAl rAisinGs limited

1947 FederAl Government Attempts to nAtionAlise the BAnks

1950s unreGulAted FinAnce compAnies set up

1959 reserve BAnk oF AustrAliA estABlished


Redbank Military Camp QLD, 1942, courtesy of the Commonwealth Bank of Australia.

wwII AND AFtEr During WWII the federal government introduced tough rules about the flow of funds in and out of Australia, and it was up to the Loans Council to limit borrowing so that funds could be re-directed to the war effort. Capital raisings that were not related to the war were also limited and investment was steered towards the war. After the war, controls on investment were lifted to help support the rebuilding effort.

At the time, the Commonwealth Bank played roles as the federal government’s bank and as the banker for those serving in the war. Many of its employees also served in the armed forces, as did staff from all the banks. During the war, some Northern Territory branches were evacuated as a result of enemy action.

Following the war, special banking facilities were created to provide finance for post-war activities such as housing construction and industrial development. As the CBA website notes, in 1946 home loans were offered for the first time, which

were originally called ‘Credit Foncier’ loans. As part of the post-war boom and population explosion, the bank’s network was also substantially expanded after the end of hostilities and special efforts were made to assist migrants through a new Migrant Information Service.

But the banking system struggled to keep pace as the Australian economy boomed after the end of WWII. As a result, many finance companies emerged that didn’t need to comply with the regulations of the central bank and lent money to consumers for everything from cars to new appliances. In tandem, the regulated banks started establishing finance companies to be able to take advantage of the new demand for credit. Recently created entrepreneurial companies sought funding from the unregulated parts of the market.

After the war, former prime minister Ben Chifley worked hard to lift the Australian economy out of the doldrums. He extended the welfare system, built houses and opened new universities. But he went too far when he decided to nationalise the banks. The thought of banks being nationalised created massive opposition among voters and the media ridiculed the idea, which was eventually found by the High Court to be unconstitutional.❚

wwii And rebuiLdinG THE NATIoN

“ The Commonwealth Bank played a key role in financing Australia’s role in WWII.”


thE rESErvE bANk EStAblIShED Before a stand-alone Reserve Bank of Australia was set up in 1960, the Commonwealth Bank carried out Australia’s central banking functions. Although the Commonwealth Bank was initially set up as a commercial and savings bank, and was not originally responsible for issuing bank notes and performing other tasks that would normally be done by a central bank, it assumed these roles over the course of the early to mid-twentieth century. As a result, during the Depression and the world wars, the Commonwealth Bank’s central banking functions included exchange and interest rate controls. These roles were formalised in the Commonwealth Bank Act and the Banking Act I945. Acknowledging a potential conflict of interest inherent in a bank that was both a commercial and a central bank, in 1951 a new law created a board within the Commonwealth Bank that was responsible for the central banking function.

Over time it was accepted Australia needed a central bank that was totally independent from a commercial bank, following the lead of many other countries around the world. The Reserve Bank Act 1959 formally separated the Commonwealth Bank from the central bank to create the Reserve Bank of Australia.❚

Left: Prime minister Ben Chifley, courtesy of News Ltd. Above: Construction of the RBA, 1962, courtesy of the RBA.

“ It was accepted Australia needed a central bank that was independent from a commercial bank.”

“ Ben Chifley went too far when he wanted to nationalise the banks after WWII.”

RB

A P

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03

268

80 The magazine for Finsia members / october 2011 v125

1960 - 79 A time of social and economic change.

1960AustrAliAn Futures mArket opened

stock exchAnGe institute creAted

1963 sAvinGs BAnks oFFer personAl loAns

1966 decimAl currency introduced in AustrAliA

the AustrAliAn BAnk oFFiciAls’ AssociAtion lAunches the First equAl pAy cAmpAiGn

1967decimAl currency issued in new ZeAlAnd

1970poseidon mininG BuBBle

1972mArried women ABle to continue workinG in BAnkinG And FinAnce

1977the First Atm

As women found their voice and protested against compulsory conscription during the Vietnam War, they were simultaneously given more rights to continue working in banking and finance once they married.

FAIRFAX SYNDICATION



DECIMAl CurrENCy INtroDuCED With 12 pence in a shilling and 20 shillings in a pounds, performing calculations in the old pennies, shilling and pound system was complex. Which is why Australia switched to the much simpler decimal currency system in 1966 (New Zealand switched in 1967). Australia’s federal government received more than 1,000 submissions from the public about the new name for Australia’s legal tender prior to the switch to decimal currency. The then prime minister Sir Robert Menzies wanted it to be called the ‘royal’ (in New Zealand the name the ‘kiwi’ was considered), but the dollar eventually prevailed in both countries.❚

A period of boom AND buST“ The Poseidon bubble led to more stringent stock market regulations.”

SyDNEy GrEASy wool FuturES ExChANGE opENS The Sydney Futures Exchange started its life in 1960 as the Sydney Greasy Wool Futures Exchange (SGWFE). Its purpose was to offer hedging facilities to Australian wool traders at a time when our wool was sought after all over the world.❚

thE poSEIDoN bubblE The Poseidon Bubble of 1970, which saw nickel explorer Poseidon’s shares, and subsequently all listed Australian mining shares, boom and then crash, had short-term negative but long-term positive consequences for the Australian share market.

Poseidon’s share price went from $1.85 on 29 September 1969 to more than $12.00 later that year and into early 1970. In January 1970 a UK stockbroker released a report that had a target value of $112 a share for the stock.

Simultaneously, a number of highly speculative mining minnows released prospectuses in the lead up to a public listing, with scant information about their likely future prospects – some didn’t even have a mining lease. A spectacular crash was triggered as the market woke up to the fact these businesses were little more than scams.

The bubble was the catalyst for more stringent stock market regulations. The Rae Committee’s inquiry into the Poseidon Bubble showed the stock market was poorly regulated and recommended a number of regulatory changes to curtail trading based on rumour and speculation.❚

A board at the Australian Stock Exchange 25 October 1976. FAIRFAX SYNDICATION

Launching the decimal currency. Courtesy of the Herald and Weekly Times.


thE bIrth oF thE SECurItIES INStItutE oF AuStrAlIA The predecessor of the Securities Institute of Australia, the Stock Exchange Institute, was formed in response to a growing need for the members of Australia’s then state-based stock exchanges, as well as their staff, to attain a formal qualification in securities trading and associated topics such as accounting and law.

The idea for the institute was formed when the then-chair of the Sydney Stock Exchange and the institute’s first president, Alastair Urquhart, was entertaining the then-president of the New York Stock Exchange, G Keith Funston. Funston talked of the New York Institute of Finance, prompting Urquhart to consider founding an Australian Institute of Finance.

But Urquhart had trouble finding the right name for the institute. As he recounted, “having been in the Australian Imperial Forces myself, I was conscious that the letters AIF were protected by law,” making it impossible to use the name Australian Institute of Finance for the new body.

The Stock Exchange Institute was incorporated in Sydney in 1966, but Urquhart was on the lookout for a better name. “Standing in the shower one morning it suddenly came to me. Keith Funston kept referring to the stock exchange as the securities industry, a term that was rarely used in Australia,” he explained.

So in January 1967 the Stock Exchange Institute became the Securities Institute of Australia. The institute’s main purpose was to bestow a qualification on employees of stock brokers and to give the public confidence in those who had studied and were members of the institute.❚ Alastair Urquhart who founded the Securities Institute of Australia.

The magazine for Finsia members / october 2011 v125 85

The open outcry system predominated in securities broking until the 1990s.

ANTON CERMAK/FAIRFAX SYNDICATION

1980 - 1999The financial services industry comes of age.

1981 AustrAliAn FinAnciAl system inquiry BeGins

1983 dereGulAtion

AustrAliAn dollAr FloAted

1985new ZeAlAnd dollAr FloAted

1987 BlAck tuesdAy stock mArket crAsh

Asx Formed

1991AustrAliAn securities commission Founded

1997releAse oF the wAllis report

1998AprA Formed


“ In the 1980s the New Zealand economy suffered shocks as the government increased controls in the financial system.”

AuStrAlIAN FINANCIAl SyStEM INquIry bEGINS By the end of the 1970s it was widely agreed bank regulation needed to change to create a more stable and efficient banking system. So the federal government announced the Australian Financial System Inquiry, more commonly known as the Campbell Inquiry.

The 260 recommendations in the inquiry’s final report laid the foundation for the period of deregulation that would become the hallmark of Australia’s financial system in the 1980s.❚

thE StArt oF DErEGulAtIoN oF thE AuStrAlIAN bANkING MArkEt In 1983 deregulation of the banking system began in earnest when the federal government announced it would allow foreign banks to offer their services in Australia. This was followed in 1984 when all controls on bank deposits were lifted and the country’s stock exchanges were deregulated. These steps laid the foundation for Australia’s current banking system and have allowed our financial system to successfully compete on the global banking stage.❚

AuStrAlIAN DollAr FloAtED With Prime Minister Bob Hawke and Treasurer Paul Keating at the helm, the Australian dollar was floated in December 1983, ending a 17-year period during which it was first pegged to the British pound and then subsequently to the US dollar.

Prior to the dollar being floated, the Reserve Bank of Australia had to contend first with significant capital outflows and tight monetary conditions in early 1983, followed by large capital inflows and unprecedented rates of monetary growth. The need for a more flexible monetary system convinced the government to take the historic step to float the dollar and at the same time drop most of the exchange controls it had previously used.❚

wAGE AND prICE FrEEZES IN NEw ZEAlAND In the late 1970s and early 1980s the New Zealand economy experienced a series of devastating setbacks including oil shocks, high unemployment and inflation. In response, the then-prime minister Robert Muldoon put in place a series of controls in an attempt to improve the economy, which culminated in a wage and prices freeze in the early to mid 1980s.

At the same time, the country embarked on its ‘Think Big’ program of economic development, which included borrowing large amounts from overseas investors to fund the development of local infrastructure initiatives.

When the Labour party took power in 1984 it immediately reversed Muldoon’s approach, removing controls over bank interest rates and deregulating financial markets.❚

NEw ZEAlAND DollAr FloAtED The New Zealand dollar was floated in 1985 as part of an extensive reform process by the New Zealand Labour Party.

The decision to float the exchange rate was made to help maintain low and stable domestic inflation.❚

“ The need for a flexible monetary system convinced the government to float the dollar.”

A time of CHANgE

Bob Hawke and Paul Keating. Courtesy of the The Australian.


“ The Black Tuesday 1987 crash wiped more than 40 per cent from the value of the ASX.”

blACk tuESDAy StoCk MArkEt CrASh On Tuesday 20 October 1987 the Australian share market followed other major global markets and crashed in a spectacular fashion. The Australian market dropped by more than 500 points or 41.8 per cent by the end of October that year.

There is still much debate about the cause of the crash. Markets first dropped in Hong Kong following a US missile attack on an Iranian warship, with markets in Europe and the US following suit.

Some commentators also point to computerised stock trading, known as program trading, where sell orders are triggered once certain securities drop to a particular price, as causing a cascading downward spiral of the price of securities in a number of markets. Others simply blame a herd mentality for triggering a massive sell off by brokers around the world.❚

ForMAtIoN oF thE ASx The Australian Stock Exchange Limited (now the Australian Securities Exchange) was created in 1987 by amalgamating six state-based stock exchanges. The same year, the Stock Exchange Automated Trading System (SEATS) was launched, which replaced the ‘post’ system introduced in the early 1960s. Under the post system, stock prices were written up by ‘chalkies’, who were responsible for noting bids, offers and sales made by the stockbrokers who were members of the exchange, on boards located in the exchange.❚

Watching the markets fall outside the Melbourne stock exchange October 1987. NEIL NEWITT/FAIRFAX SYNDICATION


“ The ASX was the first stock exchange to become listed as a public company.”

thE wAllIS rEport lEADS to thE ForMAtIoN oF ASIC AND AprA 1997 marked the release of a seminal document for the financial services industry, the Financial System Inquiry Report, more commonly known as the Wallis Report for its author, Stan Wallis. The purpose of the inquiry was to strengthen prudential and market integrity regulation of the financial system and at the same time increase competitive outcomes and reduce the costs of financial intermediation. There were many steps taken following the review to encourage new entrants, to open up the payments system and to facilitate the coming wave of new technology.

As a result of the recommendations of the Wallis Report, the Australian Securities Commission took on a consumer protection role across superannuation, insurance and deposit taking. At the same time, it was renamed the Australian Securities and Investments Commission.

A key recommendation of the Wallis report was the creation of a stand-alone prudential regulation authority in Australia. And so, the Australian Prudential Regulation Authority was established on 1 July 1998. Over time, APRA has played an important role in harmonising capital adequacy standards between deposit takers and insurance companies, reducing the number of regulatory contact points for financial conglomerates and developing a consistent set of rules for banks, building societies and credit unions.

The sound fundamentals of the Australian financial services industry and the strength of our financial system throughout a number of financial crises can be attributed in part to the successful oversight role APRA and ASIC have played since they were set up.❚

bIrth oF thE SupEr SyStEM Former federal treasurer and prime minister Paul Keating can be credited as the father of the modern superannuation system, having orchestrated and put in place the super guarantee. Under this guarantee, from 1992 it was agreed that 3 per cent of all Australians’ wages would be paid as superannuation, a figure that rose to 9 per cent by 2009. Prior to this, only public servants and senior managers were paid super. The government recognised widespread lack of retirement savings was going to put considerable strain on the welfare system as the population aged, a key reason why compulsory superannuation was introduced.

The super guarantee has underscored the development of the Australian superannuation system, which is now one of the largest retirement savings systems in the world. Presently there is more than $1.28 trillion in the superannuation system. There are plans to raise the superannuation guarantee to 12 per cent.❚

Chief executive officer and managing director of the Australian Stock Exchange (ASX) Richard Humphry, Alan Cameron of the Australian Securities and Investment Commission (ASIC) and ASX chairman Maurice Newman as the newly-demutualised ASX began trading on its own market.


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FouNDAtIoN oF NEw ZEAlAND’S MoDErN FINANCIAl SyStEM Deregulation of New Zealand’s banking system started in earnest in 1984. Legislation that restricted competition in the finance sector was removed, which abolished a system that split the financial services industry into four areas and controlled who could operate in each market.

From 1987 there have only been two categories of financial institutions, registered banks and non-bank financial institutions. Only banks that are registered with the Reserve Bank of New Zealand can use the word bank in their name.

Deregulation has allowed competition within the Kiwi banking and finance sector to flourish and has encouraged a service-oriented approach to banking. Banks are extremely customer focused and highly integrated with the global banking system.❚

ASx lIStS oN ItS owN ExChANGE In 1998 the Australian Stock Exchange became the first stock exchange on the world to list on its own exchange as a public company, after going through a demutualisation process. The decision to demutalise was taken so the exchange could be run on a more commercial basis.

In the lead-up to demutualisation the exchange canvassed a variety of models that failed to get the required support of two-thirds of the membership. Under the final model members were issued with an equal number of 166,000 shares following demutualisation.

Today, almost every major exchange operates under the same model the ASX spearheaded 13 years ago.❚


2000 - 2011Turbulent times.

2001collApse oF hih

2002FinAnciAl services reForm Act

2005FinsiA Formed

2008lehmAn Bros collApse

Government GuArAntees BAnk deposits

2011 BAsel iii

Although tough times for the financial services sector were around the corner, the millennium started on a positive note with the Sydney Olympics.



The collapse of hIh A seminal event in the Australian financial system was the 2001 collapse of HIH Insurance, the largest corporate failure in Australian history. The collapse had far reaching consequences for the general insurance market and for corporate governance. It also heralded a new era of strength for APRA. Following the collapse the prudential framework for general insurance was tightened, APRA’s powers in the industry were expanded and its resourcing was considerably strengthened.❚

fInancIal servIces reform acT In March 2002 one of the most significant pieces of legislation governing the financial services was enacted. The Financial Services Reform Act, which started on 11 March 2002, was the culmination of a wide sweeping review of the financial services in Australia and implemented a number of the recommendations put forward in the Financial System Inquiry that preceded the act.

The key initiatives the act introduced included: > One licensing regime covering financial advice and financial products.

> Consistent and comparable disclosure for financial products.

> Consistent authorisation procedures for financial exchanges and clearing and settlement procedures.

The act, which is one of the central planks of Australia’s financial services regime, applies to securities, derivatives, general and life insurance products, superannuation, bank accounts and payment facilities.❚

“ In March 2002 one of the most significant pieces of legislation governing the financial services was enacted.”

furtHer reGuLAtion uNDERSCoRES ECoNomIC gRowTH


“ Australian banks’ profits dropped only marginally during the financial crisis.”

AuStrAlIAN bANkS wIthStAND thE GlobAl FINANCIAl CrISIS The collapse of US bank Lehman Brothers triggered the most serious downturn in financial markets since the Depression. The crisis peaked in Australia in March 2009 when the benchmark S&P/ASX 200 index bottomed at 3121 points.

Throughout the crisis, Australian banks proved to be more resilient than many overseas banks. There are a number of reasons why Australian banks survived the crisis in better shape than their counterparts overseas. With global credit markets effectively closed following the collapse of Lehman, in October 2008 the federal government announced a temporary, fee-based guarantee for wholesale funding, giving banks the ability to raise large volumes of term funding in domestic and offshore markets. This effectively allowed the banks to continue lending throughout the crisis and provided a stabilising influence on financial markets. During the crisis period, many large overseas banks suffered serious losses, and many were nationalised.

But the profits of the major Australian banks dropped only marginally during this period. The ability of the banks to maintain their profits was in part due to the relatively strong performance of the Australian economy during the crisis, as well as to less exposure to high-risk assets and low impairment rates. The strong prudential regulatory framework overseen by Australia’s key banking regulators, ASIC and APRA, has been credited around the world as a key reason Australia’s banks survived the crisis in such robust shape.❚

SpECIAl rulES For AuStrAlIA uNDEr bASEl III In the wake of the 2008 financial crisis new global minimum capital requirements are being introduced for banks. Under the new regime, called Basel III, there will be a considerable strengthening of the quality of capital, the introduction of a formal corrective action regime and macroprudential component into the capital framework, the addition of a simple leverage ratio as a backstop to the risk-based regime and the first global liquidity and funding standards.

Under the new minimum capital requirements, bank paper or debt is not going to be relied on for liquidity purposes, because in many instances these instruments were frozen in the financial crisis.

Basel III’s new rules stipulate banks must hold enough liquid assets to last for 30 days in the event of a crisis and they must also rely on government rather than bank debt for liquidity purposes.

This requirement poses particular challenges for Australia because, as a country, we don’t issue enough government debt for the banks to hold the required government debt to comply with the rules.

So the question as to what Australian banks could use as a substitute for high quality, liquid assets such as government debt was raised with the Basel III committee.

The solution was for the Reserve Bank of Australia to make an alternative, secured facility available to Australian banks to plug the gap, with banks required to pay to access the facility.

Among the top one hundred international banks, Australia’s four majors remain part of only a very small group to be rated AA.❚


“ People are involved with Finsia because they believe it is doing good work in the industry.”

finsiA: AN INSTITuTE IN EVoLuTIoNThe creaTIon of fInsIa In 2005 “The merger of the AIBF and the SIA to create Finsia was done for all the right reasons,” says Fred Grimwade who was the national president of the SIA at the time.

“The way the financial services industry was headed, the lines were blurring between the membership of the two organisations and with the AIBF’s base in Melbourne and the SIA’s base in Sydney, it made good sense to merge the two together. The cultures were compatible and it was a genuine merger – a win/win for both organisations that created the pre-eminent body in financial services in Australasia,” he says.❚

fInsIa ToDay Today, Finsia remains a unique professional body, representing the full spectrum of professionals working in the financial services industry. Our professional development programs and policy initiatives are designed to drive ever higher standards of professionalism in the industry, giving those who engage with our members confidence that Finsia members are at the forefront of their field.❚

fInsIa eDucaTIon solD To Kaplan In April 2007 Finsia’s education business was sold to global education business Kaplan for $36 million. The transaction was the culmination of a three-year process to review the future of the education division.

The sale has given Finsia the opportunity to be transformed from being an education provider to a member-focused body that is appropriately resourced to support the evolving needs of professionals working across the spectrum of

financial services. It has enabled us to better connect members with each other and with the information and ideas they need to succeed and to advance their careers.

The president at the time of the sale, Michael Shepherd, said it “crystallises fair value for Finsia’s investment in its education business to enable us to develop and provide a wider range of services for members”.❚

Mike Pratt SF Fin, former Finsia joint president 2005; Brian Salter SF Fin, former Finsia chief executive officer; and Fred Grimwade SF Fin, former Finsia joint president 2005, at the Sydney Finsia brand launch in 2005.

“ Finsia has become the pre-eminent financial services body in Australasia.”

The magazine for Finsia members / october 2011 v125 95


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to the very real power of people. We are ManpowerGroup.

manpowergroup.com.au

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© 2011 ManpowerGroup. All rights reserved.

ExperisManpowerManpower ProfessionalRight Management

EVERY INNOVATION. EVERY ACHIEVEMENT.EVERY BREAKTHROUGH IS ONLY POSSIBLE BECAUSEIT’S HUMANLY POSSIBLE. Ideas are manufactured only by the imagination and the

determination of people. And only the businesses that

recognise this are the ones who will succeed. Our mission is to help organisations across the globe achieve more than

they ever thought possible. From workforce assessment, recruiting and training, to career management and talent

based outsourcing, our Innovative Workforce Solutions let businesses reach their fullest potential by reawakening them

to the very real power of people. We are ManpowerGroup.

manpowergroup.com.au

manpowergroup.co.nz

Relentless gRowth Is hUMAnlY PossIBleAt Experis, we know what drives your company. We know what motivates talent. And with a wide range

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Cover of Vol 1 of the Journal of the Bankers’ Institute of Australasia 1886.

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