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Produced and published by the School of Historical & Philosophical Studies, The University of Melbourne
Published July 2008
Published July 2008
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Melbourne has experienced more bank and financial crises than any other Australian city. Two major crashes happened nearly 100 years apart, the first and most serious in the 1890s, another in the 1990s. There were some marked similarities between the episodes. Both crises were the result of the collapse of a speculative property boom that had been inflamed by strong inflows of foreign capital and excessive lending by local institutions, most notably banks. But there was a marked dissimilarity. In the 1890s the lack of involvement by the government exacerbated the crisis in two ways. First, in the half-century before the 1890s, managers of financial institutions operated without any oversight by government concerning their prudential standards of capital adequacy and the like. Furthermore, there was no implicit guarantee by the state of the safety of deposits in banks or any other financial institutions. In this era of 'free banking', banks, building societies and land mortgage companies competed recklessly for business. Too many loans were made that ended in default once the property boom collapsed. Banks and other lenders discovered that many of them had insufficient capital to make good the losses, and so faced insolvency. An insufficiency of gold coin when panicking bank depositors sought to withdraw cash in anticipation of stoppage brought about the outcome depositors wished to avoid. In the space of three years nearly all of Melbourne's 47 building societies and all of the dozen or so land mortgage 'banks' failed, while nine of the 12 trading banks closed their doors for several months and three of these ultimately failed. The bank crashes of the 1890s traumatised Melbourne's bankers and their customers for a generation.
Nearly a century later Melbourne experienced another bank and financial crash. While this episode was concentrated on only one bank and an important building society rather than the whole system as had been the case in the 1890s, it resulted in a sharp loss of confidence in the integrity and probity of the financial institutions. Unlike the earlier crash, Commonwealth and State governments played a major role in these events. The Commonwealth Government's decision to increase interest rates in 1989 brought about the deep recession that put pressure on those financial institutions that were heavily exposed to the property market. Ironically, it was the venerable government-owned State Bank of Victoria (SBV) that failed. The massive losses resulting from the grossly irresponsible lending of its merchant bank subsidiary, Tricontinental, were too great for the parent to absorb without government support. The besieged State Government agreed to sell the SBV to the Commonwealth Bank of Australia at a loss in 1990. Meanwhile the privately owned Pyramid Building Society, part of the Farrow group of companies, was known to have lent recklessly and rumours about its safety swept the city. The Treasurer, who sought to reassure nervous depositors and shareholders of its safety, was later to be roundly condemned by those who accepted his advice but lost their money when the society collapsed. A number of parties including the State Government, auditors, the Reserve Bank of Australia, Pyramid's depositors and shareholders became involved in a round of recrimination and litigation seeking to transfer blame and to pass their loss to another party. Both the Treasurer and the Premier resigned as a consequence of the SBV and Pyramid affairs and the government was swept from office at the next election.