Historical Development

Established in 1788 as a penal colony, the city of Sydney has been characterised by rapid population growth for much of its history. Starting in the nineteenth century, the driving factors have been the Australian Gold Rush, as well as its role as the most important port and commercial centre, and also in the city’s position as the capital of the state of New South Wales.

But within Australia, Melbourne has historically been a strong economic competitor to Sydney due to its position as an industrial centre.; in fact, for much of the history since colonisation, Melbourne enjoyed a greater economic significance than its northern rival, to the extent that its campaign to become the capital of the Australian Commonwealth led to the establishment of Canberra as a compromise. However, Melbourne’s economic superiority waned with the economic crisis of the 1970s, which marked the beginning of the decline of the Australian industrial sector.

Sydney benefited from its role as the seat of the central bank and as the centre for commercial banks, while the financial sector in Melbourne was strongly entwined with the industrial sector. When the Commonweatlh Bank was established in 1911, it also exercised the functions of a central bank (issuing bank notes and lender of last resort) until 1959, and thus Sydney was home to the most important institution for any financial centre. When the Commonwealth Bank handed over its central banking functions to the newly established Reserve Bank of Australia in 1959, it was also located in Sydney (Schedvin 1992). In the 1950s, the financial markets of Melbourne and Sydney were roughly equivalent. With the increase in

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importance of global financial markets and the deregulation of the financial system in 1983, the economic centre of Australia increasingly shifted to Sydney, since it provided an international airport which made rapid global connections possible and thus established Sydney as a global hub. It was also closer to the raw-material quarries that were booming at the time and attracted foreign investment. In addition, Sydney is also the centre of the Japanese and Korean communities in Australia, which strengthened international relations. Thus, the financial sector was the dominant economic sector in Sydney from the 1970s onward. This happened with the support of various federal governments. For instance, around 1987, the various exchanges of individual states were consolidated into the Australian Stock Exchange in Sydney by a decision of parliament. In 2006, this merged with the Sydney Futures Exchange (SFE), creating the ninth-largest exchange in the world, bearing the name ASX (Australian Financial Markets Association 2014). The dominance of the financial sector was also reflected in a skyscraper boom, which characterises the cityscape to this day (Daly 1984).

An additional component is that the inward orientation of the Australian financial sector has driven Melbourne’s traditional position as a competitor to Sydney. For instance, most banks were originally headquartered in Melbourne, and only moved to Sydney in the 1980s; however, they still maintain major representative offices there. In the global rankings for 2014, Melbourne was placed only one spot behind Sydney, at 24. By this assessment, Melbourne profits mainly from so-called instrumental factors – in particular, quality of life, while Sydney continues to enjoy a “reputational advantage,” which is to say, a higher subjective appreciation by the respondents in relation to the objective conditions.

8.2.3 Institutional Structure

Although Australia is treated as a liberal market economy of the Anglo-Saxon type in comparative capitalism research, the state has historically always exercised a controlling influence on a macro-structural level. During the first half of the twentieth century, the government of Australia mainly influenced economic events via infrastructure projects and the creation of necessary frameworks. Unlike coordinated market economies, the expansion of social security systems was always kept to a minimum. Therefore, although Australia does not in historical terms match precisely the liberal market model, it is still undoubtedly closer to it than the coordinated economies of continental Europe. From the 1980s onward, there have been

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a variety of reforms aimed at the integration of the Australian economy into the global economy, such as the reduction in capital controls, privatisation of the public sector, and the decentralisation of collective agreements from the state level to the level of individual holdings.

These were based on the so-called “Washington consensus” (Williamson 1993) and thus moved the Australian economy closer towards the free-market model (Chester 2008).

Despite the political focus on the creation of a competitive market economy, the institutional order of the Australian financial market is structured quite conservatively. One the one hand, banks are the central institutions. Traditionally, their business involves deposits and credit-backing industrial companies and individuals, especially with regard to real estate financing. Although the banking sector has in recent years made an increased push into the investment business – and thus developing from a pure retail model towards a universal banking model – the traditional deposit and lending business still dominates.

Altogether there are 55 active banks in Australia. The banking sector is dominated by the

“Big Four,” the four major Australian banks, who divide the market among themselves and account for eighty percent of private loans in Australia.

Credit Institute Total assets

(billion AU$)

Market capitalisation (billion AU $)

Commonwealth Bank (CommBank) 753.90 (2014) 154.80 Westpac Banking Corporation 770.80 (2013) 123.43 Australia and New Zealand (ANZ)

Banking Group (ANZ)

642.12 (2012) 101.79 National Australia Bank (NAB) 862.00 (2014) 94.86

Table 8-1: Key figures for the “big four” (Source: Bank’s annual reports)

With the exception of the Commonwealth Bank, ‘the Big Four’ emerged from regional banks at the end of the nineteenth century and acquired their status through acquisitions and mergers with other institutions. The Commonwealth Bank, however, was owned by the state until 1996, and exercised the functions of a central bank until 1959, in addition to commercial business.

These four banks are subject to the “Four Pillars Policy,” which took effect in 1990: a reciprocal ban on acquisitions, which was put in place to prevent the monopolisation of the Australian banking sector and to guarantee fair competition. This, however, led to a de facto oligopoly of these banks. On the one hand, this limits the competitive pressure; on the other, limited competition allows for longer-term planning, thus contributing significantly to the stability of the Australian banking system, (as evidenced during the Global Financial Crisis).

Accordingly, the Four Pillars Policy is ideologically controversial, but is even considered

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worthy of protection by the current Liberal-National coalition government. In addition to the Big Four, the retail market is served by small credit unions that were mostly occupational, at least originally.

Total Assets (2010, in AU$ billion)

Share (%)

Big Four 1 812 74.5

Other domestic banks 295 12.1

International banks 327 13.4

Total 2 434 100.0

Table 8-2: Australian banking sector by total assets (Source: Australian Financial Markets Association 2014)

International banks in the Australian market are particularly active in the investment sector, given that this sector is the least covered by local institutions. However, these are largely niche activities with relatively low volume.

Unlike the highly concentrated banking sector, the organisation of pension funds is heavily fragmented. Originally, Australian pension funds were operated either by companies or branch unions. In the 1970s, the sector was liberalised. In addition to “industry funds”, this also created individual company funds as well as funds managed by private vendors. However, the largest share in absolute numbers is taken by small funds: self-managed funds or funds drawn up for (up to four) individuals, managed by a professional fund manager.

PENSION FUNDS

Type of Fund

Number of entities

2009 2010 2011

Corporate 190 168 143

Industry 67 65 61

Public sector 40 39 39

Retail 166 154 143

Small funds * 406 318 427 825 460 082

Pooled

Superannuation Trusts

82 79 77

Total 406 863 428 330 460 545

Table 8-3: Number of different Australian pension funds (Source: Australian Bureau of Statistics 2013)

* Small Funds: max. 4 beneficiaries

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In this system, all workers are responsible for their own investments to a large extent, since it has to be chosen from different fund products, which are diversified according to investment style, type of investment, and risk. Since virtually every Australian is thus directly involved in the financial markets with their own capital, Australia could be considered as the ideal type of a “shareholder society”.

8.2.4 The Contemporary Importance of Sydney as a Financial Centre in the