Regulation and Australian Financial System

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Historical review

The Australian financial system evolved in five stages. The first stage was the introduction of financial institutions during the early colonial period in the 19th Century, where the influence of British institutions was a key driving force. The end of that period was marked by the 1890s depression which saw a major rationalisation of Australia’s financial institutions. The start of the modern era of financial regulation can be traced back to the introduction of banking legislation in 1945 and the establishment of Australia’s first central bank.

In more recent times, Australia has seen two major waves of financial reform. The first wave, in the1970s and 1980s, involved a major deregulation exercise which transformed
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The debate over establishing a national bank and its functions continued for the next decade as various models were considered.

The Commonwealth Bank was created in 1911 under the Commonwealth Bank Act. It was empowered to conduct both savings and general banking business supported by a Federal government guarantee. The Commonwealth Bank became the first bank involved in both trading and savings bank activities (Peat Marwick 1985:2). The Commonwealth Bank did not specifically have a central banking remit and it was not responsible for note issue, instead it was established as a vehicle to provide competition for commercial banks and to keep accounts of the Commonwealth government.

The Government took over note issuance from the private banks in 1910 and transferred that responsibility to the Commonwealth Bank in 1924 (the function was managed by the Australian Treasury in the interim period). Increasingly, the Commonwealth Bank became banker to governments.

The plan had been to allow the Commonwealth Bank to evolve into a central bank as had the Bank of England. In 1924, under an amendment to the Commonwealth Bank Act, a Commonwealth Bank Board was established and the Bank was given the power to discount bills and to establish a discount rate. This was intended to provide the footings for central
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