Deregulation and Open Capital Markets: The Australian Experience Before Wallis

Abstract

JTUCH has been written recently on the 1998 'Wallis reforms' to the Aus-% / 1 tralian financial system. But while they are important, they follow an ear-1-▼ J L lie r period of financial deregulation. Australia started liberalising its fi nancial markets in the 1970s, and the process was essentially completed by 1986. This article reviews the reform sequence before Wallis, and examines the ef fects (some of which were unexpected) of reform on financial and other markets, the macroeconomy, and the policy environment. In particular, implications for the transmission of monetary policy are examined, along with sc ~ of the challenges that liberalisation and internationalisation pose for policy-makers. The Sequence of Financial Reforms This section outlines the sequence and motivation of reform up to, but not includ ing, die Financial System ('Wallis') Inquiry (1997).' At the start of the 1970s, die Australian financial system was closed and highly regulated. Interest rates were con trolled by die audiorides, strict limits were placed on bank lending, financial institudons were required to buy government securities at non-market prices, and move ments of capital into and (especially) out of the country were tighdy controlled. This system was reformed gradually between die mid-1970s and die mid-1980s. The domestic financial system and die capital account were reformed more or less simultaneously. Domestic reform comprised die two elements of deregulating bank operations (notably the removal of controls over interest rates on certificates of deposits in Sep tember 1973, other bank deposits in December 1980, and loan rates in April 1985) and liberalising markets in government securities (notably the shift from a 'tap' to a market-based tender system for Treasury Notes in December 1979 and Treasury Bonds in August 1982). Deregulation of banking operations gave banks responsi bility, allowing them to shift from simple credit allocation to liabilities management l A chronology o f reform o f the domestic financial sector and the capital account is provided in an Appendix. Accounts o f financial deregulation in Australia include Harper (1986), Battellino and

Retail bank marketing in Western Australia

“…Wide sweeping reforms gradually yet persistently introduced parallel reforms of allowing foreign government agencies and banks to invest in Australian securities and the lifting of restrictions on banks domestically. This is well described by de Brouwer (1999). As de Brouwer (1999, p. 51) says, at the start of the 1970s the Australian banking system was closed and highly regulated:`I nterest rates were controlled by the authorities, strict limits were put on bank lending, financial institutions were required to buy government securities at non-market prices, and movements of capital into and (especially) out of the country were tightly controlled''.…”

“…Although these authors sometimes differ in their views on the thinking behind the reforms, they agree that there was no strong argument that reforms were ideological and integrated within a wider financial reform program (although many other reforms were taking place at the same time in the Australian public service). De Brouwer's (1999) suggestion that the reforms were pragmatic and responsive, first to the constricting effect of controls and second to the needs dictated by social and economic policy formation seems plausible, given the gradual and responsive way the reforms developed. The Wallis (1997) report drew together the strands of Australia's issues and challenges in the quest for a more clear, flexible, confidencebuilding and modernized regulatory structure.…”