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Commonwealth Bank (CBA)

3.3 The Australian banking system

3.3.2 Narratives on Australian banks in data base Commonwealth Bank (CBA)

Commonwealth Bank (CBA) was established in 1911 though Act of Parliament as a federal government owned institution to carry out ‘general and savings bank business’ (Thomson

& Abbott, 2000, p. 79). In 1924 the bank was also given the authority of a central bank,

including the exclusive right of note issue. In 1960, after this dual role of the CBA had become a growing concern among private trading banks, it was finally divided into the new

Commonwealth Banking Corporation (a commercial bank) and the Reserve Bank of Australia (RBA) in charge of undertaking central banking functions (Commonwealth Banks Act 1959).

With an amendment to is founding act it changed its name to the Commonwealth Bank of Australia in 1988.

Major changes were initiated with the adoption of the Commonwealth Banks Restructuring Act 1990 which converted CBA from a statutory authority to a public company with

24 ANZ wrote off its high bad debt provisions caused by the 1990 recession over a longer period of time than did most of its peers.

conventional share capital in 1991 and allowed the issue of up to 30% of these shares to the public. 1991 also constitutes a marked improvement in CBA’s disclosure quality as earlier accounts did not contain consolidated financials with CBA’s savings and development banks reporting as separate entities before 1989.25 The long-term historical financial comparatives in the 1991 share issue prospectus allowed an extraction of some non-reported data as far back as1981.

An important chapter in CBA’s history ended in July 1997 when the federal government, which had been reducing it shareholdings since 1991, at last sold off its 50.1% majority stake to the public (Commonwealth Bank Sale Act 1995). At the same time, this sale initiated the phase-out of government guarantees for CBA’s liabilities and CBA thus became an institution purely governed by the applicable banking and corporations law.

The following subsections present the major institutions absorbed into CBA during the observation period. The acquisition of New Zealand based ASB Bank will be discussed in the New Zealand part of these narratives. State Bank of Victoria (CBA succeeded to its assets per 1 January 1991)

One major trigger for CBA’s 1991 conversion was the need to bail-out troubled State Bank of Victoria (SB Victoria). This institution founded in 1841 strongly expanded its asset base and scope of activities during the deregulation of the 1980s. Its eventual downfall was caused through soaring credit losses and especially the collapse of its merchant banking arm

Tricontinental taken over in 1985. First signs of stress in Tricontinental’s portfolio were reported in the 1989 annual report. In 1990, the Victoria state government agreed to compensate SB Victoria for loan write-offs of up AUD 2.1 billion. Finally, per 1 January 1991, CBA became

‘successor in law’ of SB Victoria.

25 So-called ‘combined’ P&L and balance sheets were provided back to 1984 but detailed disclosure was disaggregated by unit. Colonial State Bank / State Bank of New South Wales (acquired per 3 June 2000) The insurance and banking conglomerate Colonial Ltd acquired by CBA in 2000 included the assets of former State Bank of New South Wales (SB NSW) which had been operating under the name of Colonial State Bank since having been corporatized and finally sold off by the NSW government per 31 December 1994.

SB NSW traced its origins back to one of Australia’s first savings banks founded in 1819 and later merged with Government Savings Bank of New South Wales. When this bank’s savings bank activities were assumed by CBA in 1931, it adopted the name “Rural Bank of New South Wales” until it changed its name to State Bank of New South Wales in 1982. SB NSW found itself in an awkward position of competing in the newly deregulated market of the 1980s without being able to offer savings bank products until 1987, when a historical 1931

amalgamation agreement with CBA was finally terminated.26

Like other banks, SB NSW was hit by the ensuing economic crisis of the late 1980s. It reported levels of bad debt provisions in excess of 4% of loans but unlike its counterparts in Victoria and South Australia it did not require government support. As the financial performance of SB NSW remained unsatisfactory, the NSW state government decided to offer it for sale in late 1993. With the four major trading banks excluded from tendering, Colonial Mutual Life was chosen as the purchaser. Finally, as mentioned above, Colonial Mutual Life, which demutualized in 1996 to become Colonial Ltd., operated the bank under the name of Colonial State Bank until Colonial itself was absorbed by CBA in 2000.

26 Early in 1931, the Government Savings Bank of New South Wales closed its doors and froze the savings of depositors (Davidson & Salisbury, 2005). Later in December 1931, the failed bank was amalgamated into CBA. CBA was conferred an exclusive right of a state savings bank in NSW while passing on half its profits on these activities to state government owned Rural Bank of NSW. When Rural Bank of NSW changed it name to SB NSW in 1982, a dispute with CBA over the transfer of these profits arose which was only settled in 1987. Trust Bank Tasmania (acquired 2000 as part of Colonial transaction)

A final minor addition to Commonwealth Bank’s asset base also related to the takeover of Colonial Ltd. A few months before this transaction, Colonial had agreed to acquire Tasmania based Trust Bank in November 1999, the last remaining state bank. This institution had been struggling with investments in modern infrastructure, namely computer systems and had been formed at the peak of the financial crisis in 1991 by a combination of The Saving Bank of Tasmania (The Hobart Savings Bank) and ailing Tasmania Bank. Tasmania Bank itself had only been established as a state bank by Act of Parliament four years earlier in September 1987 through the merger of Launceston Bank for Savings and a local building society. Both

Launceston Bank for Savings, in later years operating as Statewide Bank, and Hobart Savings Bank, later operating as Savings Bank of Tasmania – SBT Bank, trace their roots back to the early colonization of Tasmania and were founded in 1835 and 1845 respectively.