The Evolving Structure of the Australian Financial System

During the past two or three decades structural change in the Australian financial system has been rapid. The system has grown substantially in assets and volumes of activity, has become much more open and competitive, and has undergone some significant shifts in market shares. There has also been much innovation in financial products and delivery systems. In analysing these historical trends a useful distinction can be made between two major parts of the financial system: the financial intermediaries (or credit institutions), of which banks form the largest part; and the funds managers, typified by superannuation funds and unit trusts. Although the overlaps between these two institutional groupings are increasing, their historical trends have been driven by rather different forces. Within the intermediaries sector two broad processes of change have been evident. The first involved the interaction between regulatory policy and financial innovation. Prior to the main thrust of financial deregulation in the late 1970s and early 1980s, banks lost market share to less heavily regulated institutions, a trend that eventually gave impetus to the move to deregulate. In the post-deregulation period, these trends in market share were reversed and, in the process, the system was opened to greater competition. The second main historical process has been a shift in the economics of production of banks’ traditional financial services – what is often referred to as a process of ‘unbundling’. This entails a move toward production and pricing of key products on a stand-alone basis, stimulated by the development of specialist suppliers such as mortgage managers or cash management trusts. Competition from these sources has put pressure on the traditional full-service suppliers (the banks) to cut margins and to reduce cross-subsidies. In the funds-management sector, and particularly the superannuation funds, the driving forces have been somewhat different. Policy changes in the areas of taxation and compulsory contributions have had an important impact on the structure of the industry. However, the most important factor behind the rapid growth of the industry since the early 1980s has been the high average rate of return accumulated on fund investments over that period. The available data do not yet show the increases in net new contributions to the funds expected to result from increases in compulsory contributions. Notwithstanding the historical differences between the two sectors, there have been increasing areas of overlap between them. For example, banks have become more active in funds-management business through subsidiaries, and funds-management institutions have become more active in areas of traditional bank business such as mortgage lending. These developments pose a challenge for regulators as to where are the appropriate regulatory boundaries between the different groups of institutions.