RDP 9605: The Evolving Structure of the Australian Financial System 1. Introduction

Like other industrial countries, Australia has experienced major changes to its financial system in recent decades. The net effect has been a transformation in the Australian financial system from a relatively closed, oligopolistic structure in the 1950s and 1960s, based predominantly on traditional bank intermediation, to a more open and competitive system offering a much wider variety of services from an array of different providers. This process of financial system evolution, while driven largely by market forces, has been assisted by prevailing regulatory and supervisory arrangements.

A process comparable to that seen in Australia has been observed and widely discussed in the United States under the generic heading ‘the decline in traditional banking’.^[1] There, the phrase has been used to describe a long-term trend involving financial disintermediation and a resulting fall in the relative size of the banking sector compared to other forms of financing. It has been associated, in particular, with an increasing trend towards financing through securities markets. The debate in Australia has been somewhat different, though it shares some common elements with the overseas experience. Here, the focus has been not on a decline in banks per se since, by most quantitative standards, Australian banks currently dominate the financial system as much as at any time in the past few decades. Rather, against a background of change, the focus is on how the competitive forces already at work might affect the future structure of the system, including the nature of the core business of banking and the boundaries between banks and other providers of financial services.

Among the range of influences on financial-sector development, three main forces can be highlighted. The first has been the role of financial regulatory policy which, to an important degree, shaped the broad trends in banks' market shares in recent decades – the extended period of decline up until the early 1980s and subsequent recovery in the post-deregulation period. Second, technological developments have been important in reducing the cost of many information-intensive financial activities and in making available a wide range of new products and delivery systems. A third influence arises from the interaction of these first two factors with the historical cost and pricing structure of traditional intermediation, and in particular with the traditional cross-subsidisation of payments services by banks. The persistence of elements of this pricing structure has created opportunities for growth of specialist low-cost financial service providers which have become an increasingly important source of competitive pressure on banks. An analysis of how these forces have shaped the evolution of the system underlies much of the discussion that follows.

In Section 2 of the paper we give a general overview of the main trends in the financial sector and try to relate those trends to the changing demands of the users of financial services: the government, household and business sectors. Section 3 deals in more detail with banks and financial intermediaries while Section 4 looks at the life insurance and superannuation sector, with an overall assessment drawn together in Section 5. There is an attempt in that final section to raise some questions about the boundaries between the traditionally defined institutions which form the basis of existing supervisory and regulatory arrangements.

Footnote

See Edwards (1993) and Ettin (1995). An alternative view is given by Boyd and Gertler (1994). [1]