BARRIERS TO ENTRY IN AUSTRALIAN BANKING SECTOR Essay Example

Barriers to Entry in Аustrаliаn Banking Sector

In every country, there are rules that need to be complied with before issuing a license to the new entrance into a banking sector. This essential in maintaining the strength of currencies to avoid issues of inflation, currencies losing value and the loose customers can experience in the case of the sudden closure of a bank.

  1. Government regulations

The governing, through its agencies, controls the performances of commercial banks in Australia. Competitions in the banking sector are illegal in Australia because the sector is sensitive. According to Cornish (2013) Australian banks have always made a significant profit because of these barriers that regulate the new entrances. The Australian government regulates this industry so that customers are protected from predatory service providers.

  1. Switching cost

According toMichael E. Porter, an economist, switching from one line of business to another can be costly. It requires retraining of employees, buying the relevant machines and acquiring a license for operations. In Australia, it is required that special computer software to be used, and other legal requirements within the banking hall.

  1. Economies of Scale

Small and new banks find it so hard to enter the banking sector in Australia. This is because the existing big banks are well developed and they are currently experiencing lower average cost. Furthermore, Commonwealth Bank, NAB, Westpac and the ANZ have well established brand names; it is hard for the new bank to enter the market because they would not be able to attract customers. Finally, when the start-up capital is too high, it is impossible for the new small companies to enter into the market (Duke and Cejnar, 2013).

  1. Customers Loyalty

According to Subramanian (2013) the big four Australian banks; namely Commonwealth Bank, NAB, Westpac and the ANZ have gained customers’ loyalty. It will be a challenge for the new entrances to challenge these banks because they own a large market share.

  1. Diminishing returns

The banking industry in Australia requires a high start-up capital, and at the same time the nature of business has a problem of diminishing returns. This makes the new entrances not to venture in this business.

  1. Monetary Authority requirement

The legal requirement for a new entrant into the banking sector in Australia is cumbersome. There are various capital requirements for both existing and the new entrance. The Australian Basel Committee proposed the following capital as the minimum requirements;

  1. Common equity. This is the capital that is required to act as a loss-absorbing capital

  2. Tier 1 capital requirement. This is also a new requirement besides the standard capital requirement

  3. Capital conservation buffer. This is a unique amount of capital that need to be maintained by the commercial banks in Australia. These capitals will be used in case of financial and economic crisis.

All these requirements make it impossible for the new entrants into the banking sector in Australia (Davies and Green, 2013).

In conclusion, it is essential for the Australian government, and the monetary authorities to control banking sector so that the customer would not suffer in case of a bank winding up. The banking sector is sensitive and it requires tough rules so that only qualified players are able to enter the market.

References

Cornish, S. (2013). Susan Howson, Lionel Robbins. Agenda: A Journal of Policy Analysis

and Reform, 20(1), 97.

Davies, H., & Green, D. (2013). Global Financial Regulation: The Essential Guide (Now with a

Revised Introduction). Polity.

Duke, A., & Cejnar, L. (2013). Competition and the banking sector: friend or foe?. Law and

Financial Markets Review, 7 (3), 152-158.

Subramanian, M. K. (2013). Director’Remuneration and Performance in the Big Four Australian