You are an economic policy advisor in a Commonwealth government department. Given the
findings of the Royal Commission into Misconduct in the Banking, Superannuation and
Financial Services Industry, you have been asked to investigate the economics of retail
banking. The final report can be found here:
But be warned that it is a massive document of over 1000 pages and I do not encourage you
to read all of it, maybe take a quick look at the introduction and recommendations.
Your supervisor is particularly concerned that competition between banks does not seem to
eliminate misconduct and poor consumer outcomes in the banking industry. The key issue
seems to relate to how truly competitive the banking sector is in Australia. While there are
many smaller banks or mortgage providers, the sector seems to be dominated by four major
The Productivity Commission (a commonwealth government body) recently completed a
major inquiry into Competition in the Australian Financial System which you will find here:
This is also a very large report so do not get in too deep. It may be best to read the overview
document and then go to specific parts of the full report if required.
One of the key issues highlighted here is the trade-off between competition and bank
stability. This is the trade-off you have been asked to focus on. You are required to write a
summary of the key economic issues.
Your assignment must address the following issues:
(1) Provide a short introduction to your report, clearly defining the issue/problem.
2) Explain the Australian market for retail banking, focusing on the market structure, drawing
on data to highlight any dominance or competition.
(3) Make sure you provide succinct definitions for the market structures we observe; e.g.
monopoly, oligopoly, Stackleberg leadership, cartel behaviour or monopolistic
competition or anything else you think is relevant.
(4) Explain why governments and regulators might be willing to tolerate a market structure
where firms exhibit some market power.
(5) Focusing on retail banking and the Productivity Commission’s report, suggest some policy
approaches that might improve competition, reduce misconduct and improve consumer
(6) Provide a short conclusion, recommending what you think is the most effective policy and
why. This should be a couple of sentences, you do not need to re-cover all of point 5, you
want a very succinct statement that the supervisor can use to push the policy suggestion.
Note also:
Make sure you provide definitions of important concepts.
• It is essential to break up your assignment using appropriate headings for sections
responding to the numbered items above.
• You are encouraged to expand your research on this though you should not get too
technical, this briefing is for a policy audience. You should properly cite any materials that
you draw on.
• The word limit will be strictly applied. Any content beyond 1100 words (word limit
+10%) will not be taken into account when assessing your assignment. Do not go over
the word limit. NOTE: The list of references will not taken to contribute to the word