Submission to the Inquiry into the Australian Banking Industry Appendix 1: Changes to Bank Regulations

House of Representatives Standing Committee on Finance and Public Administration

This appendix outlines:

  1. major regulations affecting banks in 1968;
  2. 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 secured 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.
Banks were permitted to trade as principals in foreign exchange, subject to the requirement that they clear their net positions with the Reserve Bank each day (previously, they had traded as agents for the Reserve Bank).
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.
October The three-month initial notice requirement on savings bank investment accounts was reduced to one month, and the minimum balance requirement was removed.
1979
June The trading banks began operating a foreign currency hedge market.
1980
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 accounts 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.
Savings banks were allowed to accept deposits of up to $100,000 from trading or profit making bodies.
1983
October

Changes to Australia's foreign exchange arrangements were announced:

  • Settlement by the Reserve Bank of the net spot foreign exchange positions of banks would be on the basis of a $A/$US mid-rate announced at the end of each working day.
  • The Reserve Bank removed outer limits on margins which apply to banks' dealings in spot foreign exchange in $US with their customers.
  • The Reserve Bank withdrew from underwriting the official forward exchange market, and ceased quoting forward exchange rates.
  • The Reserve Bank ceased to absorb the trading banks' net positions in forward exchange at the end of each working day.
  • Greater freedom was given to trading banks to hold foreign exchange balances abroad and to borrow abroad for the purpose of matching their forward transactions and permission to hold limited ‘open’ spot positions in foreign exchange.
December The Australian dollar was floated, and most foreign exchange controls were removed. Banks were no longer required to clear their spot foreign exchange positions with the Reserve Bank each day.
1984
April The Treasurer announced that the number of foreign exchange dealers would be increased by authorising non-bank financial institutions that met certain criteria.
June Controls precluding banks from buying or selling forward exchange to cover non-trade-related risks were removed.
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 accept banking authorities.
The Reserve Bank published its general approach to prudential supervision and its framework for the supervision of the capital adequacy of banks.
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. Funds 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.
The Reserve Bank announced plans to establish links with banks' external auditors on prudential issues.
June The Reserve Bank announced a more formal approach to supervision of banks' large credit exposures. This included regular reporting to the Reserve Bank of exposures to individual clients or groups of related clients above 10 per cent of shareholders' funds.
September The Reserve Bank announced new guidelines for measurement of banks' capital adequacy. The definition of the capital base was widened and banks established before 1981 were asked to maintain minimum capital ratios in the vicinity of 6 per cent of total assets. Trading banks established in 1981 and afterwards continued to be required to observe a minimum capital ratio of 6.5 per cent during their formative years.
1987
January The Reserve Bank announced revised arrangements for the supervision of banks' large credit exposures. It asked each bank to give it prior notification of any intention to enter into exceptionally large exposures to an individual client or group of related clients.
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 Basle Committee of Banking Supervisors.
The Treasurer foreshadowed 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’. Subject to some transitional arrangements, all banks (trading and savings banks) would be required to hold in the form of non-callable deposits 1 per cent of their liabilities (excluding capital) which are invested in Australian dollar assets within Australia. 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 being unable to be totally removed without amendments to legislation, as an interim step, the ‘free choice’ 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 the savings bank Reserve Asset Ratio.
1989
August The Reserve Bank issued revised guidelines for the supervision of banks' large credit exposures. Each bank was asked to report large exposures in terms of the consolidated group, rather than on a banking group basis.
September The interest rate paid on non-callable deposits would be set monthly at 5 percentage points below the average yield at tender in the previous month on 13-week Treasury notes.
December Changes to Banking Act gave the Reserve Bank explicit powers in respect of prudential supervision of banks; removed the distinction between trading and savings banks and formally replaced the Statutory Reserve Deposit requirement on trading banks with a non-callable deposit requirement applicable to all banks.
1990
February The definition of PAR assets was amended to exclude the non-callable deposits of banks with the Reserve Bank. PAR reduced further, to 6 per cent by May 1990.
May The Treasurer announced that the Government was not opposed, in principle, to a non-mutual life office owning a bank provided various criteria were satisfied.
June From 30 June 1990, banks were required, for the purposes of assessing capital adequacy, to deduct from total capital their equity and other capital investments in non-consolidated subsidiaries or associates effectively controlled by the bank.
September The Reserve Bank announced (with effect from September 1991) that, for the purposes of assessing capital adequacy, a bank's holdings of other banks' capital instruments (other than trading stock) should be deducted from the investing bank's total capital (and assets).

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]