Australia, after years of self-imposed isolation from turbulent world financial currents, now wants to become a major Pacific Basin banking center.
The task likely will take years because Australia enters the game late against such established rivals as Tokyo, Hong Kong, Singapore, San Francisco and Los Angeles. Observers predict, however, that financial markets in the region will become increasingly specialized, allowing the island continent to carve its own niche in, say, commodities or certain types of trade finance.
After two years of debate under a new Labor government, Australia in February for the first time granted full banking powers to 16 foreign financial institutions. The banks, including five major American firms, are expected to pump hundreds of millions of dollars of new capital into the Australian economy in exchange for the right to take deposits and lend directly to Australian consumers and businesses.
The payoff for Australia is enhanced stature in world money markets that only global banking firms can offer. In addition, the four major Australian banks that have thrived under protectionist regulation will be allowed to expand abroad under reciprocity agreements.
Australian finance minister Paul Keating surprised the world banking community by admitting 16 foreign banks, after giving indications for more than a year that only six or seven would be granted licenses. The resulting scramble for markets by the big banks could take some of the fun out of opening up a new continent.
“All the banks who applied were caught by surprise,” said Ken Swan, senior vice president of Australia & New Zealand Banking Group Ltd. and manager of its Los Angeles office. “We’re at a point where the banks have been allowed in but haven’t started operating. You’ll see a considerable change in the Australian market over the next year, but how it all evolves, only time will tell.”
Swan said his bank welcomed the foreign competition because it was linked to deregulation of the domestic banking industry. Most interest rate ceilings were lifted and limitations on lending volume relaxed. He said Australia’s future as a major regional banking center depends in large measure on what direction the government’s deregulation efforts go.
“People will make a decision on where they can operate as they wish from a regulatory point of view. Singapore is still highly regulated; Hong Kong, much less so. Australia still is in the process of deregulating,” Swan said. To be granted a license, a foreign bank had to specify its intended capitalization, local equity involvement and business plan. It appears, however, that the banks are rethinking their Australian ventures in light of the larger-than-expected freshman class.
One banker said there were even rumors that one or more of the 16 might choose not to enter the suddenly competitive Australian market.
Citicorp, the biggest U.S. banking firm, said it plans to commit $400 million in capital to its new Australian subsidiary, Citibank Ltd., and open as many as 50 branches nationwide.
Bank of America, pursuing a broader retail strategy, plans to fund its Australian unit at about $100 million but attack the consumer market in strength through an association with Australia’s largest department store chain, G. J. Coles & Co. BA Australia Ltd. intends to begin installing automated teller machines in some of Coles’ 1,000 stores next spring.
Chase Manhattan, Bankers Trust New York and Morgan Guaranty Trust all have announced substantial capital commitments but are somewhat more reticent in outlining their business plans. It is expected that they will concentrate more heavily on the corporate market. Also admitted to Australia were 11 banks from Japan, Great Britain, West Germany, China, Canada and New Zealand.
Many other big foreign banks have had a presence in Australia for years, generally operating through consumer finance companies or merchant banking offices. Los Angeles-based Security Pacific, for example, has provided corporate finance services through its Security Pacific Australia Ltd. unit since 1970. The firm, with $270 million in assets, acts very much like a merchant or investment banker, said Managing Director Frederick C. Kempson.
“We didn’t apply (for a full banking license) because it’s going to be tough to compete with indigenous Australian banks who’ve been on the scene for 100 years and have a large staff and infrastructure,” he said. “We’ve found a significant niche in Australia as a merchant bank with specialized products.”
Richard J. Flamson III, the Security Pacific chairman, told a group of Japanese journalists earlier this week that “the Asian Rim, as we see it, has no single dominating financial center.”
He said Tokyo has been hampered by emphasis on industrial rather than financial growth, Hong Kong concentrates heavily on foreign exchange and Singapore picks up the pieces left by others. West Coast American banks have specialized in trade finance but now are extending their reach.
“Some experts feel that the trade drive of the Pacific Rim in the 1950s to ‘70s is giving way to a financial drive in the 1980s,” Flamson concluded.
That’s what Australian officials are betting on.