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1999 Special Article - Institutional Arrangements and Policy
In the area of macroeconomic management, the Campbell Report recommended a tender system for the issue of government securities, which was adopted for T-Bonds in 1982. The recommendation to lift Loan Council control on the borrowing by 'market' public authorities was implemented for large semi-government authorities in July 1983. In late October 1983 the arrangements applying to foreign exchange settlements between Australian banks and the Reserve Bank of Australia (RBA), and to dealing between banks and their customers, were changed, and the banks were given the freedom to hold both foreign exchange abroad and limited open spot positions. Subsequently, on 9 December 1983, the Government announced the floating of the Australian dollar. These changes implemented the Campbell recommendations to dismantle the fixed exchange rate and exchange control arrangements. September 1984 saw implementation of the recommendation to abolish minimum holdings of government securities by life companies and superannuation funds. In January 1985, monetary targets were abolished in response to a recommendation to use broader monetary and credit aggregates as alternatives to M3 monetary policy targets.
Regarding controls on interest rates and portfolio composition, quantitative lending controls were largely removed in June 1982; the savings bank specified asset requirement was reduced in August 1982; maturity controls were abolished in August 1984; and the prime assets ratio (PAR) replaced the liquid government securities (LGS) convention in May 1985.
To strengthen the system, the RBA announced in April 1986 that external auditors would be used in bank supervision; in August 1988 the RBA introduced consolidated, risk weighted capital requirements for banks; the Banking Act 1945 was amended in December 1989 to allow introduction of prudential requirements by regulation; and in 1992 the Financial Institutions Scheme commenced and the Australian Financial Institutions Commission was established for the prudential supervision of building societies and credit unions.
Sixteen new licences were issued to foreign banks in 1985 with the removal of entry barriers. In 1992 foreign bank branches were allowed to widen their operations to include all banking activities except retail deposits, and from December 1993 they could also raise offshore funds through non-bank subsidiaries to remove withholding tax disadvantages.
In summary, the 1980s and early 1990s saw barriers to entry to the financial system removed, foreign exchange controls removed and the foreign exchange market deregulated, and direct controls removed on participants' lending activities and lending rates as well as on their asset portfolios. Foreign banks have established in Australia, Australian banks have increased their overseas activities, and foreign exchange market turnover in Australia now exceeds $50 billion a day.
In 1996 the Government established the Financial System Inquiry (the Wallis Committee) which reported in 19972. The recommendations from that Committee's report continue the process of regulatory reform in the Australian financial system. From 1 July 1998 the new financial regulatory framework came into effect. Under the new structure a single prudential supervisor, the Australian Prudential Regulation Authority (APRA) was established to take over responsibility for the supervision of banks, life and general insurance companies and superannuation funds. The Australian Securities and Investments Commission (ASIC) assumed responsibility for market integrity and consumer protection across the financial system. The Reserve Bank retained responsibility for monetary policy and the maintenance of financial stability, including stability of the payments system. The Payments System Board of the Reserve Bank was established on 1 July 1998 to promote both the safety and efficiency of the system.
From 1 July 1999 building societies and credit unions have been supervised by APRA. From that date APRA has supervised the benefit funds of friendly societies under the Life Insurance Act 1995, while health benefit funds of friendly societies are regulated by the Private Health Insurance Administration Council under the National Health Act 1959. Prior to 1 July 1999 building societies, credit unions and friendly societies were regulated under State legislation. From 1 July 2000 it is expected that APRA will transfer administration of self-managed superannuation funds to the Australian Taxation Office.
Another recent policy measure has been the passage of the Taxation Laws Amendment Act (No 2) 1999 which: widened the application of the Offshore Banking Unit (OBU) regime (with several new OBUs declared since then); widened exemption from interest withholding tax for corporate issuers; relaxed the thin capitalisation provisions on Australian subsidiaries of foreign banks; and exempted certain investments in the United States from Foreign Investment Fund measures.
All of these regulatory and policy changes have been targeted at increasing competition and improving market efficiency while maintaining the integrity and security of Australia's financial system.
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