How small business firms select a bank: BANKING INDUSTRY COMPARISONS

In the early 1980s, the Australian banking industry was composed of six banks that operated nationwide and several regional and state banks. In addition, the industry contained numerous building societies, finance companies, merchant banks and credit unions. With deregulation and approval by the Australian Government in 1984, 16 foreign-owned banks commenced banking operations in Australia beginning in 1985. At the same time, mergers led to the creation of four mega Australian banks, collectively known as the ‘big four’. These are the Australian and New Zealand Banking Group (ANZ), the Commonwealth Bank of Australia (CBA), the National Australia Bank (NAB) and the Westpac Banking Corporation (Westpac). These four organisations have combined total assets of$415bn representing 67 per cent of the Australian banking market.

For customers, deregulation was meant to increase the overall efficiency of the financial system and provide greater competition and service levels. After the recession of 1989/1990, however, many of the overseas banks discontinued operations in the Australian market due to insufficient returns. At the same time, the public began to question the economic benefits of deregulation. The main beneficiaries from the entry of foreign banks were the larger business customers. Small business firms did not seem to benefit. As a result, government inquiries were conducted to review the effects of deregulation and the overall efficiency of the financial system. At the time of the Australian survey, there were a total of 30 banks in operation.

In 1998, there were approximately 9,000 FDIC-insured commercial banking institutions in the United States. The majority of these were unit banks or single office institutions that serve a local community. These banks are typically smaller institutions in terms of total assets and offer limited products and services to their customers. The other end of the spectrum includes 100 or so of the largest institutions that, in addition to having extensive domestic and international activities, offer a full range of financial services to their customers. These institutions are typically organised as a bank holding company and have branch offices throughout the United States.

As in Australia, the US banking industry has not been without problems. In the last two decades, there has been a continual stream of Federal legislation enacted to remove outdated restrictions (eg the Financial Services Modernization Act of 1999), to address safety and soundness issues (eg the FDIC Improvement Act of 1991), and to remove barriers to interstate consolidations (eg the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994), thereby promoting a more competitive and efficient banking industry. To date, the changing banking structure has not had a negative effect on the small business sector. It has, however, opened up the door for the types of mega- mergers taking place between banking organisations since the mid-1990s.