Australian banking crisis of 1893

During the 1880s, there had been a speculative boom in the Australian property market. The optimistic climate was fostered by the commercial banks, and also led to the proliferation of non-bank institutions such as building societies; as they were operating in a free banking system, there were few legal restrictions on their operations, and there was no central bank or government-provided deposit guarantees. Consequently, these banks and related bodies lent extravagantly, for property development in particular, but following the collapse of the land boom after 1888, a large number of enterprises that had borrowed money found themselves unable to repay these debts, and many began to declare bankruptcy.

Banks and non-bank institutions came under increasing financial pressure, and the full extent of the crisis became apparent when the Federal Bank of Australia failed on 30 January 1893. The situation was particularity acute in Victoria, and on 1 May 1893, the Victorian government implemented a five-day bank holiday to ameliorate the financial panic and prevent any further run on the banks.[1] By 17 May, 11 commercial banks in Sydney, Melbourne, as well as other locations in Australia, had temporarily or permanently closed their doors.

The banks and other financial institutions affected included:

• August 1891 – Van Diemen's Land Bank[2]
• September 1891 – Mutual Provident, Land, Investing, and Building Society[3]
• February 1892 – Toowoomba Deposit Bank[4]
• July 1892 – Victoria Mutual Building and Investment Society[5]
• February 1893 – Federal Bank,[6] and the Queensland Deposit Bank.[7]
• April/May 1893 – Within seventeen days, three banks collapsed: the Australian Joint Stock Bank, the Commercial Bank of Australia, and the English, Scottish and Australian Chartered Bank[8][9]
• May 1893 – the Bank of North Queensland,[10] the Brisbane Permanent Building and Banking Company,[11] the City of Melbourne Bank,[12] the Commercial Banking Company of Sydney,[13][14] Federal Building, Land, and Investment Society, Limited, and Deposit Bank,[13] the National Bank,[15] the Queensland National Bank,[14] and the Royal Bank of Queensland.[16][17]

The City Bank of Sydney (absorbed by the Australian Bank of Commerce in 1917) is noted as one that did not close its doors.[18]

Whilst gold and securities were held by certain banks, many Australian institutions did not make representations to their London branches which held those deposits.[13][19]

Criticisms were levelled at the directors:

The first result is that colonial banks have frequently opportunities for making larger profits in comparison with the volume of business than is possible with home banks. The second result arising from this possibility of larger profits is that there is a greater element of risk attaching to the business than attaches to the ordinary business of a British bank, and consequently need for greater caution in investments. It needs but a moment's consideration to reveal the fact that money advanced for the carrying on of our staple industry — the pastoral industry — is exposed to greater risk than money advanced on the comparatively steady staple businesses in Britain. Our staple industry is exposed to the caprices of climate and the invasion of insects, insignificant when considered singly but terribly significant when considered in the mass. Droughts, frequently recurring, blast the hopes of the pastoralist by robbing him of all prospect of return for his labour and anxieties, and that blasting of the squatter's hopes means loss to the institution which has advanced him money.[19][20][21]

These comments of 1897 were made as the Federation Drought (1896 to 1902) commenced, which resulted in the widespread death of livestock and strains of livelihoods. There were some reforms to regulation and law with a view to preventing future abuse.[22]

• History of Australia (1851–1900)

• Hickson, C. R. and Turner, J. D. 2002. "Free banking gone awry: the Australian banking crisis of 1893." Financial History Review 9:147–167