RDP 8904: Changes in the Behaviour of Banks and their Implications for Financial Aggregates Appendix: Changes to Bank Regulations
July 1989
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This appendix outlines:
- a summary of major regulations affecting banks in 1968; and
- subsequent significant changes to these regulations.
Regulations in 1968
The powers given to the Reserve Bank (RBA) under the Banking Act (1959) were extensively used to control the activities of the trading and savings banks.
Savings Banks
Savings banks were required to invest:
- 100 per cent of depositors' funds in cash, deposits with the Reserve Bank, deposits with and loans to other banks, securities issued or loans guaranteed by the Commonwealth or a State, securities issued or guaranteed by an authority constituted by or under an Act, housing loans or other loans on the security of land and loans to authorised money market dealers (“specified” assets);
- at least 65 per cent of depositors' funds in cash, Reserve Bank deposits, Commonwealth or State Government securities and securities issued or guaranteed by Commonwealth or State Government authorities (“prescribed” assets); and
- at least 10 per cent of depositors' funds in deposits with the Reserve Bank, Treasury notes and Treasury bills (“liquid” assets).
Savings bank deposit rates were fixed, personal loan rates were subject to the same maximum as trading bank personal loans, and housing loan rates were subject to the maximum rate on trading bank overdrafts. There was a restriction of $10,000 on the maximum interest-bearing amount in any single deposit, and no deposits could be accepted from trading or profit-making bodies.
Trading Banks
Trading banks were subject to the SRD ratio, which required a percentage of Australian dollar deposits to be kept in SRD accounts with the Reserve Bank. The percentage could be varied as a monetary policy tool. The interest payable on these accounts was generally substantially below market rates (and was 0.75 per cent in 1968).[1]
The major trading banks were parties to the LGS convention, which provided for 18 per cent[2] of depositors' balances to be kept in liquid assets, comprising notes and coin and deposits with the Reserve Bank (excluding SRDs), and/or Treasury notes and other Commonwealth Government securities. The other trading banks also had agreements with the RBA to hold certain minimum liquid assets.
Deposits and loans were subject to maximum interest rates and fixed deposits were subject to minimum maturities of 3 months and maximum maturities of 2 years. Banks could accept large fixed deposits (of $100,000 and over) for periods of 30 days to 3 months subject to a maximum rate.
Term and farm loan funds were set up, partly funded by the banks and partly from the SRD accounts. Term loan funds could be used for fixed-term lending to the rural, industrial and commercial fields, and to finance exports. The loans were subject to a minimum term of 3 years and a maximum term of 8 years. Farm development loans were made for development purposes to rural producers and were subject to a maximum term of 15 years.
Quantitative Controls
Since the early 1960s, the RBA had used quantitative controls on bank lending in its monetary policy. Initially, gross new trading bank approvals were subject to RBA guidelines, with net new approvals being subject to controls in later periods. In the late 1970s and early 1980s, growth in trading bank total advances was subject to control.
Major changes since 1968
| 1968 | ||
| May | – | Banks were given approval to undertake lease financing outside the maximum overdraft arrangements. |
| 1969 | ||
| March | – | Approval was given for banks to issue certificates of deposit over terms of three months to two years, for amounts over $50,000, subject to a maximum interest rate. |
| – | Savings banks were allowed to introduce progressive savings accounts at interest rates up to 1 per cent higher than ordinary deposit accounts. The maximum amount on which interest could be paid was set at $10,000. | |
| December | – | Savings banks were allowed to offer investment accounts, subject to a minimum balance of $500, minimum transactions of $100, three months notice of withdrawal, and a maximum interest rate. |
| 1970 | ||
| March | – | Savings bank deposit rates could be varied subject to the maximum rate set by the Reserve Bank. |
| April | – | The maximum interest-bearing amount in any single savings bank account was increased from $10,000 to $20,000. |
| October | – | The savings bank prescribed asset ratio was reduced from 65 per cent to 60 per cent. |
| December | – | The maximum term on trading bank fixed deposits was increased from two to four years. |
| 1971 | ||
| August | – | The minimum balance on savings bank investment accounts was reduced from $500 to $100 and the minimum transaction requirement was dropped. |
| 1972 | ||
| February | – | The maximum interest rate on overdrafts and housing loans over $50,000 was removed, and interest rates on these larger loans became a matter for negotiation between banks and their customers. |
| – | Trading banks were given increased freedom to negotiate interest rates on deposits greater than $50,000, subject to a maximum rate, for terms between 30 days and four years. | |
| 1973 | ||
| April | – | The interest-bearing limit on savings bank investment accounts was lifted from $20,000 to $50,000. |
| September | – | The interest rate ceiling on certificates of deposit was removed, and the maximum term was extended from two to four years. |
| 1974 | ||
| March | – | The interest-bearing limit on savings bank ordinary and investment accounts was lifted, and the 3-month notice requirement replaced by one month's notice, after a 3-month minimum term. |
| September | – | The savings bank prescribed asset ratio was reduced to 50 per cent, and the liquid assets ratio cut to 7.5 per cent. |
| 1975 | ||
| January | – | The agreement between banks to maintain a uniform fee structure was discontinued, as it was contrary to the Trade Practices Act. |
| 1976 | ||
| February | – | The maximum overdraft and housing loan interest rates were extended to loans drawn under limits of less than $100,000. |
| November | – | The interest rate payable on SRDs was increased to 2.5 per cent. |
| 1977 | ||
| May | – | The savings bank prescribed asset ratio was reduced to 45 per cent. |
| 1978 | ||
| August | – | The savings bank prescribed asset ratio was reduced to 40 per cent. |
| September | – | The maximum maturity for trading banks' term loans was increased to 10 years. |
| October | – | The three-month initial notice requirement on savings bank investment accounts was reduced to one month, and the minimum balance requirement was removed. |
| 1980 | ||
| February | – | Savings bank statement accounts were introduced. |
| May | – | Banks could apply to the Reserve Bank to increase their equity in money market corporations to a maximum of 60 per cent. |
| December | – | Interest rate ceilings on all trading bank and savings bank deposits were removed. |
| 1981 | ||
| August | – | The minimum term on certificates of deposit was reduced to 30 days. |
| November | – | Trading banks could offer line of credit facilities, comprising a limit to be drawn down at any time with a minimum monthly amount to be repaid; the interest rate to be subject to the maximum applying to personal loans for limits of less than $100,000. |
| 1982 | ||
| March | – | The minimum term on trading bank fixed deposits was reduced from 30 to 14 days for amounts greater than $50,000, and from three months to 30 days for amounts less than $50,000. The minimum term for certificates of deposit was also reduced to 14 days. |
| – | Savings banks were allowed to accept fixed deposits less than $50,000 for terms between 30 days and 48 months. | |
| – | The requirement of one month's notice of withdrawal on savings bank investment account was removed. | |
| May | – | The interest rate payable on SRDs was increased to 5 per cent. |
| June | – | The Reserve Bank announced the ending of quantitative bank lending guidance. |
| August | – | Savings bank specified assets requirement was reduced to 94 per cent to allow a “free choice” tranche of 6 per cent. |
| – | The 40 per cent prescribed asset ratio and the 7.5 per cent liquid assets ratio for savings banks were replaced by the Reserve Assets Ratio (RAR). This ratio required 15 per cent of depositors' balances be held in RBA deposits, CGS and cash. | |
| August | – | Savings banks were allowed to accept deposits of up to $100,000 from trading or profit making bodies. |
| 1983 | ||
| December | – | The Australian dollar was floated, and most foreign exchange controls were removed. |
| 1984 | ||
| August | – | All remaining controls on bank deposits removed. This included the removal of minimum and maximum terms on trading and savings bank deposits, and removal of restrictions on the size of savings bank fixed deposits. This allowed banks to compete for overnight funds in the short-term money market. |
| – | Savings banks were permitted to offer chequeing facilities on all accounts, and the $100,000 limit on deposits by a trading or profit making body was removed. | |
| – | The 60 per cent limit on banks' equity in merchant banks was lifted. | |
| September | – | The Treasurer called for applications for new banking authorities. |
| 1985 | ||
| February | – | Sixteen foreign banks were invited to take up banking authorities. |
| April | – | The remaining ceilings on bank interest rates were removed, with the exception of owner-occupied housing loans under $100,000. |
| May | – | The Prime Assets Ratio (PAR) replaced the LGS convention. Twelve per cent of each bank's total liabilities in Australian dollars, (excluding shareholders' funds), within Australia, had to be held in prime assets, comprising notes and coin, balances with the Reserve Bank, Treasury notes and other Commonwealth Government securities, and loans to authorised money market dealers secured against CGS. Fund in SRDs up to 3 per cent of total deposits could also be included as prime assets. |
| November | – | Definition of PAR denominator extended. |
| 1986 | ||
| April | – | The interest rate ceiling on new housing loans was removed. Existing loans remained subject to the previous maximum interest rate of 13.5 per cent. |
| 1987 | ||
| April | – | The savings bank reserve asset ratio was reduced to 13 per cent. |
| 1988 | ||
| August | – | The Reserve Bank issued guidelines for a risk-based measurement of banks' capital adequacy, broadly consistent with the proposals developed by the Bank for International Settlements. |
| – | The Treasurer announced the abolition of the SRD requirement and the removal of the distinction between trading and savings banks. | |
| September | – | From 27 September, the SRD ratio was reduced to zero, and the funds in SRD accounts transferred to “non-callable deposits”. All banks (trading and savings banks) would be required to hold one per cent of their liabilities (excluding shareholders funds) in Australia in the form of non-callable deposits. The excess of the non-callable deposits over the minimum requirement would be returned to banks over a three-year period. |
| – | The distinction between savings and trading banks cannot be totally removed without amendments to legislation. As an interim step, the “free tranche” of savings banks was increased from 6 to 40 per cent effective from 30 September. | |
| – | PAR reduced from 12 to 10 per cent. Banking (Savings Banks) Regulations amended to permit PAR as it applies to trading banks to replace RAR. | |
Footnotes
The SRD ratio was adjusted frequently over the period 1968 to 1981 and ranged between 3 and 10 per cent. The ratio was last used as a tool of monetary policy on 6 January 1981, when it was increased to 7 per cent. Changes to the SRD ratio are set out in Table C.5 in the Reserve Bank Bulletin. [1]
Except between February 1976 and April 1977, when it was 23 per cent. [2]