Finance Law

LAW30002
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 The Australian Banking System
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Part 1
 On the Agenda this week
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General Unit Information

The Role of Law (general and in Banking)
Regulatory Institutions
Prudential Supervision
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General Unit Information

 Course Structure & Materials
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Structure
> Lectures
> Tutorials

Materials
> Textbook
> Check Canvas for additional reading
 Learning Outcomes
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To understand the legal foundations for banking in Australia

To understand and interpret the key legislation and common law that
controls banking

To understand legal issues and legal obligations and financial

relationships between banks and the other parties

To critically evaluate legal issues in three main areas of Finance Law

> Australian Banking System
> Overview of Superannuation Regulation
> Insurance Law

To identify what government authorities are responsible for supervision

and the extent of their powers
Main types of Financial Institutions
in
TextAustralia
line

Authorised Deposit-taking Banks (84); Building Societies

Institutions (ADIs) (3); Credit Unions (4)

Money market corporations

(broker dalers) (8); Finance
Financial Institutions Non-ADI Financial Institutions
Companies (117); Securities
(-)

Life – (29), General –(96),

Health Insurance Companies
(37); Superannuation funds
Insurers and Funds Managers
(2,337); Trusts (-), Common
funds (-); Friendly Societies
(12)
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The Role of Law

General and in Banking
 Law
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What is the basic function of law?

 Function of law – in general
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To regulate and control society

Law is a set of binding rules which a court will enforce

> Main sources of law statutory provisions and/or case
law
> Eg laws prohibiting and punishing criminal conduct
> Eg laws that provide a regulatory function over our
daily lives such as contract and tort law
 Why is the banking industry
regulated?
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The Great Depression

Source: The Guardian

https://www.theguardian.com/business/2019/feb/05/financial-crisis-us-uk-
crash

https://www.theguardian.com/business/2008/dec/28/markets-
credit-crunch-banking-2008
Why did Australia do relatively well
in
Textthe
line Global Financial Crisis?

See, https://www.youtube.com/watch?v=EhQ1xb7_bdw
Why did Australia do relatively well
in
Textthe
line Global Financial Crisis?

• China’s demand for resources

• Low levels of government debt
• Monetary and fiscal policy
• Increased financial market regulation
 Evolution of Law &
Text line Regulation in Banking
In the past not highly regulated

1890s: many bank failures in Australia (this degree of

instability does not exist in modern Australia)
> 54 out of 64 banks closed, only 20 re-opened
> 40% drop in house prices

Since 1900s, there has been a steady increase in

legislation and regulation
> E.g. Australian Notes Act 1910 (Cth), Bank Notes Tax
Act 1910 (Cth)
 Evolution of Law & Regulation in
Text line Banking – cont’d
1911 Commonwealth Bank was founded as the central bank in
Australia (up to 1959); now Reserve Bank of Australia (RBA)

1940s: the government had assumed greater control over central

banking esp during WW2
> E.g. more powers over lending and investment policies of
trading banks, National Security (Wartime Banking Control)
Regulations 1941 (Cth.)

The Labour Government attempted to nationalise the banking

system in the 1950s (but failed; it was ruled by the High Court
as being outside the powers vested in the government by the
Constitution), see Bank of NSW v Commonwealth (1948)
 Evolution of Law & Regulation in
Text line Banking – cont’d
1957 controversy over the Commonwealth Bank’s role as
trading and saving bank and its role as central bank

1959 Reserve Bank of Australia was founded (Reserve

Bank Act 1959 (Cth))
> Central bank of Australia
> S. 26 of the Reserve Bank Act 1959 (Cth) prohibits to
carry on business other than as a central bank

Commonwealth Bank continued as corporation

 Banking & Law
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In 1980s focus was on deregulation; regulation increased
over the last 20 years

Banking in Australia is now highly regulated

Argument against regulation:

> Interference in a competitive market

Arguments in favour of regulation:

> The consequences of bank failures on the community
> The use of banks for illegal purposes
> Concentration of ownership of banks
 Sources of Law
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2 primary sources:
> Legislation
– eg Reserve Bank Act 1959 (Cth), Anti-Money
Laundering and Counter-Terrorism Financing Act
2006 (Cth), Cheques Act 1986 (Cth))

> Common law (judge made law/ cases

– Eg Melbourne Corp v Commonwealth (1947) 74
CLR 31
 Sources of Law
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Both Australian case law and Commonwealth case law (mainly

English cases) is considered

Note: only Australian case law is required to be followed as a

precedent (Binding)
> Lower Courts are bound by decisions of a Higher Court
> High court highest Australian Court

What about cases from other Commonwealth countries and

case law from countries outside of the Commonwealth?
> Persuasive character, Australian Courts are not bound by
decision, may assist judge in finding a decision
 Sources of Law
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If you want to revise the doctrine of precedents, see:

https://www.youtube.com/watch?v=QSA1Q422r-8
 The Basel Committee on
Banking Supervision (BCBS)
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 The Basel Committee on Banking
Text line Supervision (BCBS)
Following the collapse of German bank Herstatt

The Basel Committee on Banking Supervision was formed in1974 by

the central bank governors of the Group of Ten countries

45 members (central banks and bank supervisors) from 28 jurisdictions

> Reserve Bank of Australia is a member

The committee establishes a forum on supervisory standards and

guidelines (does not issue binding regulations)
> Member countries implements guidelines in their own way
 The Basel Accords
Text line Basel I

• 1988 Basel Accord I

• Introduced “capital adequacy rule” –
internationally active banks were required to
meet a minimum requirement of 8%
• Was regarded as not flexible enough
 Basel II
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• A revised Capital Adequacy Framework was published in

2004

• Basis for prudential supervision standard from January

2008

• Aimed at improving banks’ risk management strategies

 Basel II
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The “Three Pillars” of the Basel Approach

1. More minimum capital

requirements;
2. Enhanced supervision of
capital management;
3. Substantially increased
reporting requirements

Basel II was the foundation for

Australia’s prudential supervision.
 Basel III
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• Developed in response to GFC

• 2010 updated agreement
• Enhances and strengthens three pillars of
Basel II
• Liquidity reforms to ensure banks have
sufficient funding “to survive one month of
stressed funding conditions”
• Promotion of capital buffers
 Basel IV
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Source:
BIS, The
market risk
framework –
In Brief, p. 4

https://
www.bis.org/
bcbs/publ/
d457_inbrief.p
df
 Basel IV – cont’d
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• Basel III was further revised – generally

known as “Basel IV”
• Revision to approach how to calculate credit
risk, market risk
• Banks are required to meet higher leverage
ratios
• Further disclosure requirements
• Reforms estimated in January, 2022
 Summary of the Basel Accords
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• Set of agreements focusing on banking

regulations
• Monitor: capital risk, liquidity, operational risk
and market risk
• Continuous revision of standards have
resulted in stricter rules
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Regulatory Institutions
 Regulatory bodies in
Australia’s banking sector
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Council of Financial
Regulators

Australian Securities
Australian Prudential
and Investments Reserve Bank of
Regulation Authority Australian Treasury
Commission Australia (RBA)
(APRA)
(ASIC)
 The Australian Securities and
Investments Commission (ASIC)
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ASIC’s role:
https://asic.gov.au/about-asic/what-we-do/our-role/
> ASIC “regulate[s] Australian companies, financial
markets, financial services and professionals who
deal and advise in investments, superannuation,
insurance, deposit taking and credit.”
Responsible for business conduct and consumer protection
Regulatory and enforcement powers (e.g. issuing of
infringement notices)
 The Australian Securities and
Investments Commission (ASIC)
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Achievements, in 2017/18: e.g. raised A$1,227 million for
Government in fees and charges
Source: ASIC, Annual Report 2017-18
 The Australian Prudential
Regulation
Text line Authority (APRA)
• Established in 1998

• Independent institution that supervises and regulates financial

institutions (banking, superannuation, insurance), See,
https://www.apra.gov.au/about-apra

• Is responsible for prudential regulation of financial institutions

(previously exercised by RBA)

• Promoting financial stability

• Protecting interests of depositors, policyholders and

superannuation fund members
 The Reserve Bank of
Australia
Text line (RBA)
• The country’s central bank since 1959

• Governed by the Reserve Bank Act 1959

(Cth)

• Role of the RBA: See,

https://www.rba.gov.au/about-rba/
 The Reserve Bank of
Australia
Text line (RBA) – cont’d
Responsible for financial stability
> Contributing to stability of currency
> Contributing to full employment
> Contributing to economic property and welfare (s.
10(2) of the Reserve Bank Act 1959)
Regulation of payment systems by controlling the risks,
promoting efficiency and competition
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Prudential Supervision
 Basics of prudential supervision
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• APRA is the responsible institution

• Basel II formed basis for APRA’s prudential supervision

• Ensuring financial institutions remain financially stable

and maintain general standards

• Providing customer protection

• Area where the law is amended regularly

 Prudential Acts
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Banking Act 1959 (Cth) (hereafter Banking Act)

Life Insurance Act 1995 (Cth) (hereafter Life Insurance Act)
Insurance Act 1973 (Cth) (hereafter Insurance Act)
Private Health Insurance (Prudential Supervision) Act 2015
(Cth) (hereafter PHS Act)
Superannuation Industry (Supervision) Act 1993 (Cth)
(hereafter SIS Act)
 The Banking Act
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• The Act provides for the prudential supervision and monitoring of all
companies involved in banking business (so called ADIs –
authorised deposit-taking institutions)

Note: ADI includes banks, building societies and credit unions,

all are regulated by APRA as ADIs

• Contains restrictions on entry into banking,

Only RBA and ADIs, sections 7 and 8 of the Banking Act

• Contains powers given to APRA

 Prudential Supervision:
Text line Licensing power of APRA

APRA is responsible for granting a licence to a corporate

body that is authorised to do banking business
> S7 of the Banking Act: It is an offence for a person
other than a body corporate to carry on any banking
business in Australia unless there is an exemption in
force

> S9 of the Banking Act: any corporation which

wishes to carry on the business of banking may apply
to APRA for the authority to do so
 Prudential Supervision:
Text lineRevocation power of APRA

APRA has power to revoke authority by

giving notice in writing, s9A of the
Banking Act, if:
> Contrary to the national interest
> Contrary to the interests of the depositors of
the body corporate
> Contrary to financial stability
> Failure to pay financial sectors levies
> Failure to comply with Banking Act or other
legislation that is relevant
 Prudential Supervision:
Text lineMonitoring power of APRA

APRA monitors the liquidity standards of financial institutions

APRA issues various prudential standards in relation to

prudential matters that ADIs must follow
> Standards clarify, supplement and reinforce matters
set out in the legislations
> Provide greater flexibility and enhance effectiveness of
regulations

APRA undertakes inspection of the ADI’s capital

management programme
 Prudential Supervision:
Investigative power of APRA
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An ADI in trouble (eg unable to meets its obligations to

depositors or was concerned as to its ability to do so in
the future) must inform APRA
> APRA can request the supply of more information,
such as books and documents

APRA has the power to investigate the ADI in terms of its

financial stability and the measures it is taking to stabilise
its position (eg capital management system)
 Prudential Supervision:
TextProtection
line of depositors’ power of
APRA
• The GFC led to a deposit guarantee scheme in Australia

• APRA exercises power to protect depositors in Australian

banks, though not foreign corporations

• Depositor confidence is for the benefit of the bank (and

the banking system) as much as for the depositors
 Summary: Prudential
Text line Supervision
• The nature of prudential supervision is
heavily focused on maintaining adequate
levels of liquidity and

• Ensuring depositor confidence in the

banking system
More regulation does not necessarily
mean
Text line better
• More regulation increases compliance costs
• Disproportionate impact on smaller banks
Source: Sheila Bair, 16 January 2014, http://fortune.com/2014/01/16/new-
banking-rules-more-isnt-always-better/
 How confident are you in the
Australian
Text line banking industry or the
effectiveness of regulation?

• Inquiry into conduct of financial services entities

• 10,323 submission received
• Mainly in banking (61%), superannuation
(12%) and financial advice (9%)
• Reasons why issues arise:
• Profit driven conduct (institutional and
personal gain)
• Asymmetry of power and information
between facilities and customers
• Conflicts between duty and interest were
often resolved in favour of entities and not
customers
• No accountability of institutions