The Impact of the Wallis Inquiry on Australian Banking Efficiency Performance

Abstract

Since the deregulation of the Australian financial system in early 1980s, the banking industry has undergone sweeping changes. As of December 2005, there were 53 authorised banks in Australia, including eleven foreign subsidiary banks and 29 branches of foreign banks (APRA 2005). With the entry of foreign banks and former domestic building societies into the market, domestic banks have reacted to the intensified competition by performing more efficiently and engaging more actively in mergers and acquisitions. However, the four major banks generally hold the view that the consolidation of the financial services industry and the competitiveness of the industry in the international market have been hindered by a restrictive political and regulatory environment, such as the four pillars policy prohibiting mergers among the four major banks (Guy and Whyte 2002). Therefore, it is important to analyse the performance of the Australian banking industry, with particular reference to the Wallis Inquiry into the Australian Financial System (hereafter the Inquiry) in 1996, to which the Australian Federal Government responded by adopting the four pillars policy. A series of inquiries into the financial system has been conducted by the Government, including the Campbell Inquiry in 1981, the Martin Inquiry in 1991 and the Wallis Inquiry in 1996, aiming at deregulating the financial system and enhancing the competitiveness in the financial market. The final report for the Wallis Inquiry (hereafter the FSI) evaluated the overall effects of past deregulatory process and set the direction for future policy. Whilst the Inquiry has focused on “enhancing competition and contestability in the Australian financial system” (Harper 1997), the FSI contained 115 recommendations in three broad categories, namely new regulatory structure to safeguard the financial system, consideration of mergers and acquisitions and recommendations concerning managing changes. The FSI recommended the abolition of the “six pillars” policy, which had prohibited mergers among the four major banks and the two largest life insurance companies