With the recommendations of the Wallis Report currently being
considered by government, it is timely to look back at financial
deregulation in Australia in the 1980s. If adopted, the recommendations
of the Wallis Report will be the latest changes in a process which
started in the late 1970s. But where did pressures for change come from
in the late 1970s? Were policy makers simply reacting to economic
pressures or were other factors at work? If other factors were at work,
did each factor operate independently? If not, how did they interact?
Were their effects consistent? This article examines the process of
financial deregulation in Australia during the decade when
Australia's financial system changed from a highly regulated system
to a system with few quantitative or qualitative controls, a freely
floating exchange rate and a deficit fully financed by the market. In so
doing it answers the questions posed earlier and places the Wallis
Report in context.
Throughout most of the post-war period, the Australian financial
sector consisted of a regulated banking sector and a less regulated
non-banking sector. The banks accepted government controls because
government regulations also placed restrictions on the activities of the
non-bank financial institutions (NBFIs), and, more importantly perhaps
from the banks point of view, they were protected from international
competition by a de facto prohibition on the entry of new banks into the
Australian banking system (Harper, 1991:65).
All this changed very rapidly in the 1980s. The rapidity of the
change has been attributed to an ideological shift and is seen as
evidence of the first fruits of the triumph of economic rationalism. For
example, Helleiner (1994: 163) believes that:
Others, such as Harper (1986: 47) turn to economic forces as the
explanation for the rapid deregulatory process:
This article argues that, while changes in ideology, or ideas, and
economic forces were important, the structure of the financial sector
itself and the perceived political interests of the Labor government
elected in 1983 also affected the speed of the deregulatory process. The
remainder of the article examines the impact of each of these influences
in turn, while the concluding section integrates the analysis by looking
at how these four factors (ideas, economic forces, institutional
structures and political interests) interact to affect policy outcomes.
While deregulation of Australia's financial system actually
began under the Fraser Government and the interplay of factors was more
complex than an ideological shift within government, ideas were
significant. The pressure for a public inquiry into Australia's
financial system is perhaps the most important example of this.
Moreover, opposition to the inquiry in certain sections of the
bureaucracy, stemming from a reluctance to abandon policy levers thought
to be necessary for controlling the economy, also arose from ideas about
the appropriate role for, and operation of, economic policy.
Although the possibility of a review of the financial system was
briefly canvassed by the LNP Coalition during the 1975 and 1977 election
campaigns - prompted primarily by a concern over lack of funds to small
businesses (Harper, 1986: 42)--the idea was dropped after each election
(Pauly, 1987: 33). There was no consensus of opinion within the
financial policy community supporting a review of the financial system,
although industry groups were lobbying for the relaxation of controls in
specific areas. The main beneficiaries of regulation, the NBFIs, were
not in favour of comprehensive reform, although they were keen to see
the end of the banks' monopoly on dealing in foreign exchange,
arguing that foreign exchange licences should be separate from banking
licences (Phillips, 1995). The NBFIs which were subsidiaries of overseas
banks wanted bank status in Australia (Phillips, 1995). The banks were
also selective about how the financial system should be deregulated
(Argy, 1995). Just as the NBFIs wanted an end to the banks'
monopoly over foreign exchange transactions, the banks were united in
wanting an end to the currency hedge market. The banking community was
less united, however, over the process of reform--whether the financial
system should be deregulated, or whether financial controls should be
extended to cover NBFIs. For example, the Australian Bankers Association
1978 discussion paper highlighted the erosion of market share because of
the banks' inability to compete with the less regulated non-banking
sector and put forward two possible solutions; relaxing regulatory
controls on banks, or (the option initially favoured by some of the
banks) neutralizing the discriminatory impact of controls by extending
them to cover NBFIs (Pauly, 1987: 35).
Opposition to comprehensive deregulation was even stronger within
certain sections of the bureaucracy (Macfarlane, 1991: 61). The
Treasury, while happy to deregulate interest rates, was not in favour of
deregulating the exchange rate (Treasury, 1981: 101 -102), nor the entry
of foreign banks (Davis and Lewis, 1982: 538). Furthermore, the Treasury
believed it was dangerous to hold a public inquiry without first
ascertaining what would emerge from that inquiry (Argy, 1995). For
example, in the mid-1970s when John Hewson (as advisor to the then
Treasurer, Phillip Lynch) wrote a paper recommending an inquiry into the
Australian financial system, senior Treasury officials (Sir Frederick
Wheeler, Treasury Secretary and John Stone, Deputy Secretary) informed
Hewson that the last thing Australia could afford was the financial
sector looking at itself (Hewson, 1995). While the Reserve Bank was
committed towards moving towards a more market-based system, there was
internal debate within the Bank about how fast this movement should be,
with the then Governor (Sir Harold Knight) generally favouring a more
conservative approach (Phillips, 1995).
The greater readiness of the Reserve Bank to move (however slowly)
towards a more deregulated financial system was probably the result of
institutional and intellectual factors--the fact that the Reserve Bank
was more involved in the market (Phillips, 1995) and the influence of
officials within the Bank, such as Austin Holmes, who were important in
building a stronger intellectual case for change (Johnston, 1995). For
example, Holmes was an early exponent of the view that direct controls
over banks were ineffective because they encouraged the growth of
unregulated alternatives, and, even in the 1950s, was advocating
abolition of interest rate ceilings on home finance (Carew, 1989: 94).
Pressure for a wide-ranging public inquiry into Australia's
financial system was only coming from the Treasurer's office. The
Treasurer's Ministerial advisor (Hewson) had previously worked at
the International Monetary Fund (IMF) on international capital markets
and the effects of controls on markets. Hewson's experience at the
IMF undoubtedly influenced his views on the need for change and his
belief that a public inquiry would greatly assist moves toward a
market-based system (Hewson, 1995). Although Hewson had been unable to
persuade Lynch to support the idea of a public inquiry, he was able to
convince the man who replaced Lynch as Treasurer in 1977 (John Howard)
of the need for public inquiry into Australia's financial system.
Cabinet agreed to establish the Committee of Inquiry into the
Australian Financial System (Campbell Committee) in February 1978. At
that time primary producers were prospering, so the National (Country)
Party were not worried about the possibility of deregulation in the
financial sector (Sinclair, 1996). In any event, the National Party was
well aware of the negative effects of government controls on their
constituents. These concerns were reflected in the on-going tug-of-war
between the LNP government, which wanted as low an exchange rate as
could be manipulated, and the Treasury, concerned about inflation rather
than rural exporters, which wanted as high an exchange rate as could be
manipulated (Visbord, 1995; Perkins, 1987: 48). This on-going tug-of-war
was manifested within the policy community as bureaucratic in-fighting,
couched in political and economic terms, between the Prime
Minister's representative, the Treasury's representative and
the Reserve Bank over how the exchange rate should be set (Phillips,
1995). Those within Cabinet who were less enthusiastic about
deregulating the financial system, saw the inquiry as a politically
acceptable way of postponing decisions, or felt the outcome of the
inquiry could be controlled if necessary (Pauly, 1987: 35).
When Treasury realized it had lost the argument and an inquiry was
inevitable, it then tried to constrain the terms of reference and staff
the inquiry with people sympathetic to Treasury concerns. However the
head of the inquiry (Keith Campbell) was selected in the
Treasurer's office. Furthermore, both the Treasurer's office
and the Prime Minister's office (where John Rose was also committed
to the idea of comprehensive reform) had an input into the selection of
other committee members (Hewson, 1995). Thus, the members of the
Campbell Committee were drawn from the financial policy community and
given terms of reference which were much more wide-ranging than either
the Treasury or the Reserve Bank would have liked (Phillips, 1995).
The influence of ideas on the process of financial deregulation was
not confined to ideas about appropriate policy outcomes. Changes
motivated by institutional structures and economic forces (discussed in
the following section) assisted those pushing for reform by reinforcing
within the policy community a belief that financial deregulation was
inevitable. The Campbell Committee started its inquiry in January 1979.
At that time those working on the inquiry believed there was plenty of
time--it might be many years before the financial system was
substantially deregulated (Argy, 1995). However, by the time the
Committee presented its report to the Treasurer in September 1981, a
number of significant changes (such as the introduction of a tender
system for the sale of Treasury bonds) had already been made. Campbell
used to joke that 'if we don't hurry up with our report, there
will be nothing to report on--it will all have happened' (Argy,
Although the Treasury argued against the entry of foreign banks
during the Campbell inquiry with senior officials, such as Stone,
wanting to maintain the oligopolistic structure of the industry (Argy,
1995), the banks themselves were divided on this issue. Some banks were
happy to see foreign banks allowed into Australia, arguing that with
many countries insisting on reciprocal preference, this was the only way
they could expand overseas (Phillips, 1995). Others believed that the
entry of foreign banks would be destabilizing and disruptive, with
foreign banks having an unfair competitive advantage (Argy, 1995)
because of their experience in operating in an unregulated environment
(Davis and Lewis, 1982: 536). They therefore argued that the entry of
foreign banks should be delayed until some years after the rest of the
financial system was deregulated (Davis and Lewis, 1982: 536).
However, the bank mergers of the early 1980s were seen by other
members of the financial community as acceptance by the banks that
foreign bank entry was going to happen sooner rather than later (Argy,
1995; Phillips, 1995; Ward, 1995).1 In fact in 1966, the ANZ Bank was
anticipating foreign bank entry as likely within the next five years
(Merrett, 1985: 256). The Treasury approved these bank mergers precisely
because of their belief that domestic banks needed to be strengthened in
order to better prepare them for what everyone anticipated would be
strong competition from foreign banks (Argy, 1995). The Fraser
Government made an in-principle decision to admit foreign banks in
January 1983, but the March Federal election intervened before the
matter could be taken any further. Thus, it was the Hawke Labor
Government which invited sixteen foreign banks to establish operations
in Australia in February 1985. Evidence of widespread acceptance of the
inevitability of foreign bank entry is also seen in the fact that when
the Labor Government was preparing to deregulate bank entry, the
Treasurer (Keating) had to spend much more time convincing other
elements of the ALP of the benefits of increased competition from a
limited number of foreign banks than he did other members of the
financial sector (Ward, 1995).
As noted at the beginning of this article, financial deregulation
in Australia cannot be explained solely by the concept of
'ideas'; institutional structures and economic forces were
also at work.
3. Institutional Structures and Economic Forces
In Australia, institutional structures have tended to intensify
economic pressures for change. Regulations imposed on the financial
sector during World War II led to the creation of a two-tiered system of
banks and NBFIs which developed because regulatory controls restricted
the amount of finance the banking system was able to make available for
such purposes as housing or investment funds. However, as the
non-banking sector grew, the banks began to lose market share. Even as
early as the 1950s, an increasing volume of transactions were being
intermediated outside the banking sector and, by the late 1960s, the
banking sector was under considerable pressure from the growth of NBFIs
(Grenville, 1991:12-15). Banks responded to the competitive threat posed
by NBFIs by establishing their own non-bank subsidiaries, thereby
contributing to the increasing volume of transactions being
intermediated outside the regulated banking sector. The downward trend
in the market share of banks in the 1960s was greatly accentuated by the
sharp rise in inflation in the 1970s. Rises in inflation led to rises in
nominal interest rates in the unregulated sector of financial markets
and regulated interest rates lagged behind making this sector less
attractive to depositors. Thus, the combined assets of merchant banks,
building societies and cedit unions increased over six times between
1970 and 1980 compared with an increase of about three and a half times
for bank assets (Lewis and Wallace, 1985: 6-7).
The growth of alternative financial services and products,
facilitated by advances in communications and data processing
technology, also took place in overseas markets. The increasing
integration of world financial markets meant that where domestic
controls raised the relative cost of transactions, such transactions
were more likely to be carried out off-shore (Harper, 1986:41). Thus, in
Australia, as the regulated sector continued to shrink relative to that
of the unregulated sector, existing regulatory controls, and the
monetary policy they were designed to support, became increasingly
RBA officials were aware throughout most of the 1960s and the 1970s
that the regulatory system was not working as well as it had in the
past, and this contributed to an acceptance within the Bank of the need
to move toward a more deregulated system (Johnston, 1995). However,
there was still a variety of views within the Bank as to how fast and to
what extent the system should be deregulated (Phillips, 1995). For
example, in the early 1970s there were tentative moves towards
deregulation. Credit directives were eased; quantitative lending
controls were suspended; banks were allowed to offer market rates on
some of their deposits; the statutory reserve deposit ratio was reduced;
and interest ceilings on loans of more than $50,000 were removed
(Grenville, 1991: 18). These moves were largely reversed in the latter
half of the 1970s, when interest rate ceilings were restored and
statutory reserve deposit requirements were tightened (Grenville, 1991:
19). The range of views within the financial policy community was
reflected in debates about whether equity in the financial system would
best be served by removing existing controls or extending those controls
to cover the NBFIs (Phillips, 1995). The Financial Corporations Act,
which contains provisions to apply direct controls to the operations of
a wide range of NBFIs, was passed into law in 1974, although Part IV
(the control sections of the Act) were never put into effect (Phillips,
However, because the Reserve Bank was aware that official control
of the price of Treasury notes was causing distortions in interest rates
elsewhere in the system, a tender system for the sale of Treasury notes
was introduced in December 1979 (Phillips, 1995). This change was
initially opposed by the Treasury because it believed the government
should get its money as cheaply as possible and therefore monetary
authorities, not the market, should determine the price of funds
(Phillips, 1995). However support for this (and other changes) was
coming from within the Treasurer's office, as well as from the
influential Department of the Prime Minister and Cabinet (PM&C).
Furthermore, politicians were attracted by the political advantages of
the tender system, especially the fact that the government would no
longer have to face criticism from those adversely affected every time
there was a change in Treasury note interest rates (Phillips, 1995).
Government control over the price of Treasury bonds was also
causing distortions elsewhere in the system. The Reserve Bank was aware
of the need for change (Johnston, 1995), although an unwillingness on
the part of the Treasury, the RBA and the Prime Minister (Malcolm
Fraser) to trust the market led to a brief flirtation with a
'tap' system (2) for selling Treasury bonds before a tender
system was introduced in June 1982 (Phillips, 1995). The introduction of
a tender system for the sale of Treasury bonds was an extremely
significant step in the process of freeing monetary policy of
institutional constraints because, with the Reserve Bank no longer
forced to buy the government bonds not taken up by the market, the
deficit was now funded by the market and not the government, which meant
that the deficit could be financed without affecting monetary policy.
The tap system for selling Treasury bonds was introduced on a trial
basis on the understanding that its operation would be reviewed
'when sufficient experience had been gained in operating the new
arrangements' (Phillips, 1982: 101). As part of that review the
Reserve Bank canvassed the views of other members of the financial
policy community. Industry groups (including banks, merchant banks,
stock brokers, money market dealers and the larger institutional
investors) all supported the move to a tender system for the sale of
Treasury bonds (Phillips, 1982: 103).
Further relaxation of interest rate controls came in December 1980
when the interest rate ceiling on deposits with trading and savings
banks was removed. Relaxation of interest rate controls also aroused
relatively little conflict within the financial policy community.
Because Australia did not issue a lot of government bonds during the
late 1970s and early 1980s, monetary authorities were not unduly
concerned about the effect of deregulated interest rates on debt service
levels. Interest rate controls were designed to assist macro-economic
management and to achieve certain social goals. By the late 1970s the
Treasury believed that interest rate controls were impeding rather than
assisting macro-economic management and such controls were no longer a
cost-effective way of achieving social policy goals (Argy, 1995). If
governments wished to pursue social goals, the Treasury believed other
more explicit policy instruments were preferable (Argy, 1995). The banks
were happy to see interest rate and credit controls removed because this
decreased the competitive advantage enjoyed by the NBFIs and made it
easier for the banks to attract funds.
Once begun, movement toward a deregulated system acquired a certain
momentum, in that as some controls were removed, others became
unnecessary. When the price of Treasury notes and later Treasury bonds
were determined by the market rather than the government, there was no
need for captive markets, nor the regulations which supported them, such
as the '30/20' arrangements or portfolio controls on banks
(Phillips, 1995). Similarly, once the exchange rate was deregulated many
of the exchange controls which existed to support the managed exchange
rate and protect foreign exchange reserves were unnecessary (Phillips,
1984a: 135). Deregulation of the foreign exchange market also meant
there was no longer any reason to continue to restrict foreign exchange
dealing to banks (Hughes, 1995).3
Perhaps the most obvious example of how economic forces,
intensified by the existing regulatory framework, affected policy
outcomes is seen in the events leading up to the floating of the dollar
in December 1983. The crawling peg method of fixing the exchange rate
was generating large capital inflows and outflows and these large
fluctuations in monetary aggregates were restricting the Reserve
Bank's ability to operate monetary policy.
... in the ten years between, say, 1973 and 1983, we saw a period
of rapid and wide-ranging innovation in financial markets ... This
period was also associated with the growth of the currency hedge market
and the activities of the merchant banks in that market... There was
increasing scope, through the hedge and currency futures markets, for
exchange rate speculation... Our system of fixing the exchange rate,
together with some of our exchange controls... offered some stimulus to
speculation based on what the pundits thought we might do with the rate
on the following day or over a fairly short period ... The Australian
dollars added to, or removed from, the domestic financial system as a
result of these transactions had an effect on interest rates ... In
other words, as a result of our exchange rate management system,
Australia had elected, not necessarily consciously, to take the
world's financial volatility rather less on the exchange rate and
rather more on domestic financial conditions and domestic interest rates
(Phillips, 1984a: 132-134).
Reserve Bank views on the need for a float developed gradually. The
RBA had tried a number of alternative strategies during the last years
of the Fraser Government, but when these failed to rectify the
situation, senior Reserve Bank officials believed the only remaining
option was to float the dollar (Phillips, 1995). In the words of the
then Governor of the Reserve Bank, R. A. Johnston:
The restoration of the March depreciation had convinced a lot of
people that the existing system was unacceptable. We didn't make a
formal decision to float until the deathknock. We said that if the
existing system can work then we will give it a try but it didn't
look hopeful (cited in Kelly, 1992: 87).
However while Reserve Bank officials were becoming increasingly
convinced of the need to float the dollar, the head of the Treasury
(John Stone) remained implacably opposed (Kelly, 1992: 81-82). The
Treasury had argued against deregulating the exchange rate during the
Campbell inquiry (Treasury, 1981: 101-102) and in spite of the economic
pressures generated by the managed exchange rate, Stone continued to
believe that the costs associated with a deregulated exchange rate
outweighed the benefits. For many years the Treasury had tried to
maintain a slightly overvalued exchange rate in order to control
inflation (Harper, 1986: 41) and Stone believed that deregulation of the
foreign exchange market would remove an important constraint on
governments adopting inflationary policies.
The conflict generated within the financial policy community over
this issue delayed the decision to float the dollar. In October 1983 a
capital inflow crisis again raised the question of deregulating foreign
exchange markets. The Treasurer (Paul Keating):
... knew the decision was historic; he knew the consequences were
unpredictable. He didn't want the markets, domestic and abroad,
thinking that the Australian treasury had opposed the move. Both for the
record and his own reassurance Keating wanted the treasury on board
(Kelly, 1992: 83).
Although the Treasurer and his office, the Prime Minister and his
office, PM&C and the Reserve Bank believed the exchange rate should
be deregulated (Visbord, 1995), Stone's continuing opposition to
the float meant a compromise position was adopted where a number of
changes were made to foreign exchange, arrangements short of actually
floating the dollar. (4) While these changes reduced the potential for
speculation against the Australian dollar, they did not remove all
speculative avenues, and, in the first week of December 1983,
'strong rumours developed that the Australian dollar was about to
be appreciated sharply, [with the Reserve Bank buying] almost $l .5
billion of foreign exchange in just a few days with indications that a
lot more was to come' (Phillips, 1984b: 147). On this occasion,
economic pressure was sufficient to overcome the Treasurer's desire
for policy consensus. Although Stone continued to argue against
deregulation of the foreign exchange market, the Prime Minister and the
Treasurer decided to float the dollar and remove all exchange controls
except for controls on investments in Australia by foreign governments,
their agencies, or foreign banks (Hawke, 1994: 246). (5)
In removing the majority of exchange controls at the same time as
floating the dollar, Australia went further than most other countries in
deregulating its foreign exchange market. The business community had
been lobbying for their removal for years and was delighted with the
decision (Johnston, 1995). PM&C regarded exchange controls as a
regulatory burden on business which did not serve any useful purpose and
had also been trying to get the government to agree to their removal for
years (Visbord, 1995). Although the previous Prime Minister (Malcolm
Fraser) had been relatively open-minded on the issue at the time, the
Treasury, and consequently the Treasurer, opposed their removal
(Visbord, 1995). The Treasury's opposition to removing exchange
controls sprang from its distrust of international markets and its
belief that exchange controls (and a managed exchange rate) gave
Australia a better chance of controlling its own economic destiny
In spite of the fact that removal of exchange controls reduced
Reserve Bank functions, senior Reserve Bank officials supported their
removal because the controls were no longer achieving their original
purpose and were causing distortions. Exchange controls were originally
introduced to keep money in Australia, but throughout the 1970s the
Reserve Bank was more worried about keeping capital out of the country.
Thus, 'the Bank felt that exchange controls were a bit like the
guns at Singapore--they turned out to be facing in the wrong
direction' (Johnston, 1995). Furthermore, by the early 1980s there
were so many ways of getting around the regulations (such as under and
over invoicing, changing the nature of transactions, Off-shore deals
etc) that Reserve Bank officials had serious doubts about their
effectiveness (Johnston, 1995).
Although senior Reserve Bank officials believed exchange controls
should go, they did not believe that removal of almost all exchange
controls was politically possible. Therefore, when summoned to Canberra
on 9 December 1983 to discuss the looming foreign exchange crisis,
senior RBA officials went into the meeting with the proposal to remove,
not al 1 exchange controls, but only those necessary in order to float
the dollar (Phillips, 1995). The Reserve Bank's 'War
Book'--a document dating back to 1975 which had been put together
to take advantage of windows of opportunity which might emerge to move
toward deregulation of the exchange rate and exchange
controls--reflected this expectation (Phillips, 1995). However a window
of opportunity far wider than anticipated arose during that 9 December
meeting. John Phillips (then Chief Manager, Financial Markets Group)
describes what happened.
... I was asked by Hawke [the Prime Minister] what I thought would
happen after the float. I was telling him what I thought would happen to
the exchange rate and currency flows depending on what we did about
exchange controls and Hawke, at the end of my exposition, turned round
to Bob Johnston and said 'if you had the option of getting rid of
all the exchange controls, Governor, would you do it'? (6) And
that's how we got rid of all the exchange controls because Bob
[Johnston] turned round to Don Sanders [the Deputy Governor] and myself
and said, 'what do you think'? Our view was that it would be
difficult to manage, but if the window of opportunity was there,
you'd better take it, because you never knew if you would ever get
another chance. So that's how they all went (Phillips, 1995).
4. Political Interests
Both the Treasurer (Keating) and the Prime Minister (Hawke) were
convinced of the need to float the dollar for economic reasons. However
the decision to deregulate the foreign exchange market also served a
wider political purpose in that the decision established Labor's
credentials as an effective modern party able to deal sensibly with
fundamental economic issues.
The Hawke Labor Government was anxious not to repeat the mistakes
of the previous Whitlam Labor Government (1972-1975) and therefore
sought to balance the interests of the business community and the labour
movement (Galligan and Singleton, 1991: 3). One element in Labor's
strategy to manage the political relationship with business was to adopt
economic settings that were broadly compatible with the needs of private
capital accumulation (McEachern, 1991: 136). At the same time,
Labor's balancing act required policy decisions which publicly
signalled its probusiness sympathies (Walsh, 1991: 44). Floating the
dollar fulfilled both these requirements.
The float had a psychological significance almost greater than its
monetary effects. It sealed a de facto alliance between the government
and the financial markets; it made Keating hero of the markets. For a
while Labor became the fashion within the financial sector and even in
sections of the corporate sector (Kelly, 1992: 77).
Approval even extended to the international arena when Keating
received the 1984 Euromoney award for Finance Minister of the year.
However political interests did not always work to expedite change.
This is clearly seen in the fact that even after the Labor Party had
embraced deregulated outcomes in other areas of the financial sector,
the electoral consequences of an increase in housing interest rates
meant that it was not until April 1986, when the flow of funds through
savings banks had substantially declined, that the interest rate ceiling
on new home loans was lifted, thereby releasing more funds to satisfy
unmet demand (Perkins, 1989: 42). Even then the ceiling on existing
loans was maintained.
Similarly, although a belief that the pace of change would continue
to increase was prevalent among the policy community by the time the
Campbell Committee presented its report to the Treasurer, political
actors were less sure. In 1981 primary producers were beginning to feel
the effects of a serious drought and the National Party, worried that
any precipitate action would take Australia deeper into recession,
believed further relaxation of regulatory controls should wait until
economic conditions improved (Sinclair, 1996). The Liberals were also
less than enthusiastic, with the Prime Minister worried about the effect
of deregulated interest rates on the cost of housing finance (Argy,
1995; Hewson, 1995; Phillips, 1995). The fact that the LNP government
had been returned with a reduced majority the previous year no doubt
increased the Prime Minister's concern about the electoral
consequences of any rise in housing interest rates. The Prime
Minister's office and his department (PM&C) went through the
Campbell Committee Report to identify what was politically dangerous,
and the Prime Minister was ready to shelve the report when the Treasurer
convinced the Prime Minister to set up a task force to work with
Treasury on the implementation of the report (Hewson, 1995). Hewson and
Rose were appointed to the task force and they saw it as their job to
maintain the momentum of reform (Hewson, 1995).
Although the task force was biased towards deregulatory outcomes,
it was operating in a political environment. Phillips, another member of
the task force, said that:
... effectively all the decisions that were made on the task force
were political decisions, the ones the government thought were
politically OK they accepted, and the ones they thought were not
politically OK, they didn't accept (Phillips, 1995).
Consequently the first submission the task force took to Cabinet
(September 1982) was rejected because it went too far, too fast
(Phillips, 1995). Although it did not recommend floating the dollar,
other recommendations to do with the foreign exchange market were
regarded as unacceptable at the time (Phillips, 1995).
The second submission was more cautious in its approach to the
foreign exchange market, recommending that the issue of the exchange
rate be left to a later date (Phillips, 1995). However it did recommend
removal of almost all restrictions on interest rates, a recommendation
which was unacceptable and resulted in further redrafting (Phillips,
1995). The entry of foreign banks proved less contentious with Cabinet
accepting the recommendation in the second submission (December 1982)
that bank entry be deregulated by initially licensing six foreign banks
Reaction to the Campbell Committee Report by the Labor Party was
also governed by political considerations, with the Shadow Treasurer
(Ralph Willis) highlighting a litany of possible adverse consequences:
Total deregulation of the financial markets, as advocated by the
report, would bring about higher interest rates, increased government
taxes and charges, less finance for housing, a more volatile exchange
rate, greater foreign ownership and less control by government over the
form or pace of development of the Australian economy (cited in Langmore
and Quiggin, 1994:69).
Opposition to foreign bank entry was being urged by the left-wing
of the ALP and the two bank unions--the Australian Bank Employees Union
and the Commonwealth Bank Officers Association (Pauly, 1987: 54). Union
opposition later proved to be one of the biggest barriers Keating had to
overcome in persuading the ALP to accept the entry of foreign banks
(Ward, 1995). In the end, Keating did a deal with the Australian Council
of Trade Unions (ACTU) which supported the bank employees position on
the entry of foreign banks. In return for muted and strictly formal
opposition to foreign bank entry, the government promised to consult the
ACTU on entry criteria for foreign banks and to retain the ceiling on
housing interest rates (Pauly, 1987: 76).
Although the ALP opposed the LNP government's plan to allow
six foreign banks into Australia, threatening to block the legislation
in the Senate (Pauly, 1987: 63), (7) Keating was personally interested
in the idea Of financial deregulation, particularly deregulation of the
banking sector (Ward, 1995). Initially, Keating's views were
influenced by his dislike of the domestic banks rather than any
intellectual commitment to market-oriented outcomes (Ward, 1995).
Keating saw the banks as institutions which were politically sympathetic
to the Liberal Party, and which had done very little to support small
business, farmers and 'the little Aussie battler' (Ward, 1995;
Hughes, 1995). Keating believed deregulation would force the banks to be
more competitive and improve the services available to individual
depositors and small businesses (Ward, 1995).
Less than a month after the ALP had been threatening to block
government legislation in the Senate, Keating (as Shadow Treasurer)
announced that if the ALP won office it would commission another review
of the financial system (Pauly, 1987: 63). In making this announcement
Keating was attempting to manage the political process of moving the ALP
away from its stated policy of opposition to foreign bank entry. The
Martin Review Group was subsequently established in June 1983. Those
within the Labor Party who had supported the 1982 change to the party
platform reflecting opposition to financial deregulation and the entry
of foreign banks, did not see this review as an automatic endorsement of
financial deregulation (Langmore, 1995). But for those, like Keating,
who supported the idea of further financial deregulation, the Martin
Review Group provided a way in which the ALP could claim ownership of a
process begun under the previous LNP government (Hawke, 1994: 235).
In discussing the entry of foreign banks, the Martin Review Group
recommended that for any bank, 'the maximum share [of equity] to be
held by foreign investors be 50 per cent' (Australian Financial
System, 1984: 71). With this recommendation, the Martin Review Group
revealed its awareness of the political realities within which it
operated. The Campbell Committee rejected any local equity requirements
(Australian Financial System Inquiry, 1981:446). Foreign banks did not
want it and the domestic banks were worried that the main source of
local equity would be insurance companies whose existing branch networks
would give the foreign banks an even bigger competitive advantage
(Pauly, 1987: 62). However the 50 per cent local equity requirement
mollified those within the Labor Party who distrusted foreign investment
and were dubious about the benefits of allowing foreign banks into
Australia (Ward, 1995).
In the end practical considerations forced the government to waive
the 50 per cent local equity requirement. Initially everyone believed
about six foreign banks would be allowed in, but the number grew as
various interests were accommodated (Phillips, 1995). A balance had to
be maintained, for example, between British, European, American and
Japanese banks. State banks lobbied for the entry of specific banks with
which they had business dealings, and the large insurance companies,
such as National Mutual and the AMP Society, also had preferences for
specific banks (Phillips, 1995). With a final list of sixteen foreign
banks, it simply was not possible for that number of banks to find local
Even after this relatively brief examination of the process of
financial deregulation in Australia during the 1980s, it is clear that
the policy outcomes cannot be explained adequately with reference to a
single explanatory variable. Ideas, economic forces, institutional
structures and political interests all affected policy outcomes.
Moreover, no single factor dominated and the factors did not operate
independently of each other. For example, economic forces generated
pressure for change and this pressure was intensified by the structure
of the financial sector and ideas about appropriate policy outcomes and
instruments. At times, political interests also worked to expedite
change, although this was not invariably the case.
As identified by Harper (1986), economic pressures were generated
as the growth of financial alternatives in both overseas and domestic
markets meant banks lost market share and an increasing volume of
transactions began to be intermediated outside the regulated banking
sector, thereby rendering existing controls, and the monetary policy
they were designed to support, increasingly ineffective. The existence
of a two-tiered system of banks and NBFIs accelerated this trend.
Furthermore, although the banks and the NBFIs were divided by the degree
to which they were subject to government regulation and, to a lesser
extent, by the type of lending carried out by each type of institution,
the Australian financial sector was not highly segmented. For example,
retail banks were allowed to trade in, as well as to underwrite,
government bonds and, prior to deregulation, there was not a large
market in non-government securities, with stockbroking firms conducting
what underwriting and dealing there was.
Although the NBFIs were the main beneficiaries of the regulated
system and were worried that deregulation would destroy the competitive
advantage they had previously enjoyed over the more regulated banking
sector (Argy, 1995), the NBFIs were able to identify potential benefits
in a deregulated system and therefore did not argue against the concept
of a less regulated financial system.
I do not disagree at all with the overall claim that less
regulation in the capital market would be a good thing (Campbell,
NBFIs wanted the removal of controls which prevented them dealing
in foreign exchange (Phillips, 1995) and also wanted access to the
cheque payment system (Keating and Dixon, 1989: 44). Opposition to
financial deregulation was further muted by the decision of some NBFIs
to acquire bank status (Keating and Dixon, 1989: 44).
The fact that both banks and NBFIs were not opposed to the idea of
financial deregulation and could identify potential benefits in a
deregulated system made it easier for politicians to pursue a
deregulatory agenda, although political interests did not always work to
expedite change as politicians remained sensitive to the electoral
consequences of specific decisions.
The effect of ideas on policy outcomes can be seen in the fact that
while bureaucratic actors, especially the Treasury, were reluctant to
abandon policy levers they saw as necessary for controlling the economy,
this reluctance gradually lessened as the notion of controlling the
economy was replaced by the idea of managing the macro-economy
(Phillips, 1995). Thus, the growing consensus within decision-making
elites about appropriate policy outcomes and instruments during the
1970s and 1980s, also played a part in facilitating the process of
Financial deregulation in Australia in the 1980s was not the result
of any one overwhelming factor, but proceeded rapidly because
institutional structures, ideas and (to a certain extent) political
interests intensified the effects of economic forces. All these factors
are still important influences on policy-making in Australia. Policy
formulation in response to the Wallis Report can be best be understood
if attention is not confined to any single factor.
Appendix: Names and Relevant Positions of Those Interviewed
Treasury officer, seconded to be Secretary of the Campbell
Senior Economic Advisor to the Prime Minister 1983-1985
Economic Advisor the Treasurer 1976-78
Economic Advisor to the Treasurer 1983-1988
Governor, Reserve Bank of Australia 1982-1989
Economic Advisor the Treasurer 1983
MHR (ALP) 1984-1996
Chief Manager (Financial Markets Group), and Adviser, RBA 1983-1987
MHR (National Party) since 1963
Minister for Primary Industries 1975-79
Leader, National Party 1984-89
First Assistant Secretary Economic Division, PM&C 1975-79
Deputy Secretary, PM&C 1979-86
Advisor to Paul Keating 1979-1985
Argy, F. (1995) personal interview, 21 February.
Australian Financial System 1984, Report of the Review Group, AGPS,
Australian Financial System Inquiry 1981, Final Report, AGPS,
Campbell, I.H. (1982) 'The Effect of Deregulation of Banking
on NBFIs', in Commissioned Studies and Selected Papers Part 1,
Australian Financial System Inquiry, AGPS, Canberra.
Carew, E. (1989) 'The Experience with Financial Market
Deregulation', in C. Ulyatt (ed), The Good Fight: Essays in honour
of Austin Stewart Holmes (1924-1986), Allen and Unwin, Sydney.
Davis, K. and Lewis, M. (1982) 'Foreign Banks and the
Financial System--A Study prepared for the Australian Financial System
Inquiry', in Australian Financial System Inquiry, Commissioned
Studies and Selected Papers Part 1, AGPS, Canberra.
Galligan, B. and Singleton, G. (1991) 'Managing
Business', in B. Galligan and G. Singleton (eds), Business and
Government under Labor, Longman Cheshire, Sydney.
Garnaut, R. (1997) personal interview, 19 February.
Grenville, S. (1991) The Evolution of Financial Deregulation',
in I. Macfarlane (ed), Proceedings of a Conference: The Deregulation of
Financial Intermediaries, Reserve Bank of Australia.
Harper, I. R. (1986) 'Why Financial Deregulation?',
Australian Economic Review, No. 1, pp. 37-41.
Harper, I.R. (1991) 'Bank Deregulation in Australia: Choice
and Diversity, Gainers and Losers', in I. Macfarlane (ed),
Proceedings of a Conference: The Deregulation of Financial
Intermediaries, Reserve Bank of Australia.
Hawke, B. (1994) The Hawke Memoirs, William Heinemann, Melbourne.
Helleiner, E. (1994) States and the Reemergence of Global Finance:
From Bretton Woods to the 1990s, Cornell University Press, Ithaca.
Hewson, J. (1995) personal interview, 25 May.
Hughes, B. (1995) personal interview, 13 July.
Johnston, R.A. (1995) personal interview, 6 September.
Keating, M. and Dixon, G. (1989) Making Economic Policy in
Australia 1983-1988, Longman Cheshire, Melbourne.
Kelly, P. (1992) The End of Certainty, Allen and Unwin, Sydney.
Langmore, J. (1995) personal interview, 22 February.
Langmore, J. and Quiggin, J. (1994) Work For All: Full Employment
in the Nineties, Melbourne University Press, Melbourne.
Lewis, M. and Wallace, R. (eds) (1985) Australia's Financial
Institutions and Markets, Longman Cheshire, Melbourne.
Macfarlane, I. (ed) (1991) Proceedings of a Conference: The
Deregulation of Financial Intermediaries, Reserve Bank of Australia.
McEachern, D. (1991) 'Taking Care of Business: The Hawke
Government and the Political Management of Business', in B.
Galligan, and G. Singleton (eds), Business and Government under Labor,
Longman Cheshire, Sydney.
Merrett, D.T. (1985) ANZ Bank: A History of the Australia and New
Zealand Banking Group Limited and its Constituents, Allen and Unwin,
Pauly, L.W. (1987) Foreign Banks in Australia: The Politics of
Deregulation, Australian Professional Publications, Sydney.
Perkins, J.O.N. (1987) Australian Macroeconomic Policy 1975-1985,
Melbourne University Press, Melbourne.
Perkins, J.O.N. (1989) The Deregulation of the Australian Financial
System: the experience of the 1980s, Melbourne University Press,
Phillips, M.J. (1982) Treasury Bond Tenders--The Australian
Model', address to the Forum on the Bond Tender System, Sydney, 23
September, in Collected Speeches of M.J. Phillips A.M., Deputy Governor,
Reserve Bank of Australia 1987-1992, Reserve Bank of Australia.
Phillips, M.J. (1984a) 'The Reasons for the Float and
Experience to Date', address to the Committee for Economic
Development of Australia, Sydney, 23 January, in Collected Speeches of
M.J. Phillips A.M., Deputy Governor, Reserve Bank of Australia
1987-1992, Reserve Bank of Australia.
Phillips, M.J. (1984b)Now for 1985', address to the Australian
Forex Association Annual Conference, Canberra, 10 November, in Collected
Speeches of M.J. Phillips A.M., Deputy Governor, Reserve Bank of
Australia 1987-1992, Reserve Bank of Australia.
Phillips, M.J. (1984c) 'Financial Reform -the Australian
Experience', address to the Pacific Basin Reform Conference, San
Francisco, December, in Collected Speeches of M.J. Phillips A.M., Deputy
Governor, Reserve Bank of Australia 1987-1992, Reserve Bank of
Phillips, M.J. (1995) personal interview, 23 May.
Sinclair, I. (1996) personal interview, 8 August.
Treasury (1981) The Australian Financial System: Treasury
Submissions to the Committee of Inquiry into the Australian Financial
System, Treasury Economic Paper No. 9.
Visbord, E. (1995) personal interview, 22 March.
Walsh, C. (1991) 'The National Economy and Management
Strategies', in B. Galligan and G. Singleton (eds), Business and
Government under Labor, Longman Cheshire, Sydney.
Ward, B. (1995) personal interview, 25 May.
(1.) The only exception was the merger of the Bank of Adelaide and
the ANZ Bank in 1979 which was required by the Reserve Bank because of
the financial problems being experienced by the Bank of Adelaide
(2.) Under the tap system the Reserve Bank still set the price of
(3.) Portfolio controls on savings banks were relaxed in August
1982. The '30/20' rule was abolished in September 1984 and the
Liquid and Government Securities (LGS) convention was replaced by Prime
Assets Ratio arrangements in May 1985. NBFIs were granted licences to
deal in foreign exchange in June 1984.
(4.) The Reserve Bank altered the time for setting the exchange
rate against the US dollar from the beginning of the day to the end of
the day; abolished the limits which banks were required to deal in spot
US dollars; widened the spread between interbank buying and selling
rates; and deregulated the forward exchange market (Phillips, 1984a:
(5.) These controls were retained because the government did not
want the Australian dollar to develop into an international reserve
currency (Phillips, 1984a: 135).
(6.) Although Hawke's senior economic advisor (Ross Garnaut)
was generally opposed to exchange controls, he did not suggest to the
Prime Minister that such a question be asked (Garnaut, 1997).
(7.) The Treasury countered such threats by announcing that the
licensing of foreign banks would be done under discretionary authority
without reference to Parliament (Pauly, 1987: 63).
Ann Nevile, Public Policy Program, Australian National University.
My thanks are due to the Reserve. Bank officials, senior bureaucrats,
ministerial advisors and politicians who generously found time in their
busy work schedules to give me interviews. Details of names and relevant
positions are given in the appendix.
... liberalization decisions in New Zealand and Australia can
generally be explained by an ideological shift in favor of a
neo-liberal conception of finance within the newly elected Labour
governments in each country from the mid-1980s.
... the unique feature of the Australian experience of financial
deregulation--the rapid pace and extensive coverage of the
process--are the result of ... the fungibility of money and finance
... The unique feature of financial markets is that the developments
of substitutes via financial innovation tends to be less costly than
is the case in markets for non-financial goods and services.