As the Australian banking system shakes off the consequences of the 1980s boom-bust cycle, regulators this year are refining and strengthening the industry's operating framework.

By February, the Reserve Bank of Australia, the country's central bank, had announced measures clarifying its approach to banks securitizing their assets and released its guidelines for banks involved in funds management.

The central bank's objective is to ensure that banks clearly state where their obligations begin and end. In the case of securitization, for example, a bank need not hold capital to support assets it sells or securitizes when the sale is "clean and final." A capital requirement continues to apply, however, when a bank retains some credit exposure or other obligation regarding the asset.

The Reserve Bank's funds-management guidelines have been devised to ensure that banks keep such activities separate. The aim is that the bank not be affected by ups or downs in its managed funds area and, importantly, that the distinction be made to customers.

For example, a bank-managed fund or trustee cannot use the word "bank" in its name, and public documents such as advertisements and prospectuses must make it clear that the bank does not in any way stand behind the capital value or performance of the investments.

Opening Door Wider

These measures were followed by the federal government's announcement that Australia is opening its doors further to foreign banks.

More foreign banks can now enter the system, and foreign institutions can, under specific circumstances, establish branches rather than be forced to form locally incorporated subsidiaries.

The news, unveiled in the government's recent economic package, One Nation, was announced by Prime Minister Paul Keating who, in 1984, as treasurer, had invited foreign banks to apply for bank licenses.

That led to the establishment of 16 new banks. These, combined with the established domestic banks (four operating nationally, plus a handful of state-based banks) and several local nonbanks that chose to convert to bank status, brought Australia about 30 banks.

Given that the public is also served by a clutch of large nonbank financial institutions -- building societies, credit unions, life offices and insurance companies, and, in the wholesale sector, at one stage more than 100 merchant banks -- it is easy to see why the country has been described as overbanked.

Nevertheless, the recent announcement that more foreign banks could apply for licenses drew several expressions of interest. And a number of banks are considering switching to branch status. The appeal of that idea, or lack of it, largely depends on the nature of a bank's Australian operation.

Restructurings in Store

The prevailing and unshakable view, however, is that further rationalization of operations must occur within the banking system, possibly with existing operators refocusing rather than quitting the market.

The foreign operators that entered in the mid-1980s found life tough in a small and well-served market. With a few notable exceptions, they achieved disappointing results.

Brian Johnson, banking analyst at Macquarie Equities, said: "Because of their lack of retail deposit base, foreign banks in Australia have had trouble competing with the domestic banks -- which themselves have had difficulties in raising low-cost deposits."

Mr. Johnson pointed out that whereas, in the early 1980s, banks' noninterest-bearing deposits accounted for about 30% of their deposit base, the proportion of such deposits had dropped to about 15% in 1987 and now stands at less that 7% -- with a significant impact on banks' bottom lines.

The Australian banking sector, in common with those in many countries, has been generally weakened by nonperforming loans. In some cases, the exposures were to well-publicized fallen entrepreneurs. Increasingly, however, bad loans are consequences of recession and a down-turn in the property market.

Weakened Share Prices

The realty slump came after a period of punishingly high interest rates that squeezed a wide range of borrowers.

The Big Four banks -- ANZ, Commonwealth Bank, National Australia Bank, and Westpac -- have all seen their share prices weaken, largely reflecting concerns about aspects of their business such as exposure to the still-depressed property market.

Worst-hit has been Westpac, which is suffering from a market perception that it is not fully on a recovery path. Westpac's share price hit a 12-month low of $3.91 (Australian), or about $3 in U.S. currency, in mid-March.

Despite significantly lower interest rates, banks report minimal demand for funds.

Some observers contend that banks are operating a credit squeeze of their own, particularly in areas from which they are eager to exit, such as commercial property. Figures for the 12 months to December showed lending to the private sector had slumped 0.2% after a steady downward trend from a peak rate of 23% growth in July 1989.

Housing Loans Grow

The area growing most strongly is housing, traditionally a low-default sector. It has the additional advantage, for a bank, of bearing only a 50% risk weighting from a capital adequacy point of view.

A key measure announced in the government's economic package is meant to encourage banks to work with companies in trouble rather than foreclose on viable businesses that cannot currently meet their debt obligations. Banks will be able to claim tax deductions for partial debt writeoffs and also for losses on debt-for-equity swaps.

Banks are increasingly developing products to meet customer demand.

Ian Mattiske, director of Chase Manhattan Australia Ltd., said that business is client-driven, with product lines developed to suit that orientation. "Sophisticated risk-management products are as advanced in Australia as anywhere else," he said.

In a year when the bond market was bedeviled by credit concerns and its activity dampened by a lack of corporate appetite for debt, the biggest event was the opening of the Australian-dollar domestic bond market to major foreign issuers of the status of the World Bank and European Investment Bank.

After considerable speculation last year about the timing of the first issue, EIB and Swedish Export Credit came to market in October; they were followed by Eurofima.

So the Australian market continues to internationalize and, as has been done in financial markets worldwide, to learn from the pitfalls of the 1980s how to operate from a firmer footing in the 1990s.

Ms. Carew is a Sydney-based finance writer, commentator, and author of books including, most recently, a biography of Australia's prime minister, Paul Keating.

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