Westpac reflects a sick industry: Australia's banks are still paying for the 'collective madness' of the 1980s, reports Robert Milliken

THE big question facing shareholders of Westpac Banking Corporation, Australia's oldest and largest bank, is not so much whether Kerry Packer, the country's richest person, will attend today's annual meeting, but where Australia's troubled banking industry goes from here.

The last thing Westpac needed was a new episode of destabilisation. But that is exactly what it got with Mr Packer's dramatic resignation from the board last Thursday only a week after joining it. The drama comes at a time when Australia's banking system is desperately trying to recover from a period of upheaval and turmoil, which is being compared with the great Australian financial disasters of the 1890s.

'Unfortunately, some of the leading banks had encouraged speculation when money was plentiful, and ruthlessly suppressed it when the inevitable reaction set in. This 'traditional' banking policy, aimed primarily at safeguarding the banks' own interests, proved utterly ruinous to the general community . . . those who had ridden high on the boom now grovelled in the mud, and the whole community suffered with them.'

Those words were written by Michael Cannon in The Land Boomers, his classic history of the 1890s crash. They equally describe the cycle of the early 1990s. Not for a century have Australians faced such a crisis of confidence in their banks or witnessed such a rapid series of disasters.

Two of the country's four main banking groups have reported huge losses in the year to last September. Westpac lost almost Adollars 1.6bn ( pounds 714m) and the Australia and New Zealand Banking Group (ANZ) lost almost Adollars 580m, its worst performance for 100 years. Among the state- owned banks, the State Bank of Victoria has been largely absorbed into the Commonwealth Bank after losing Adollars 2.7bn and a question mark still hangs over the State Bank of South Australia, whose losses are estimated at Adollars 1bn.

There have been three inquiries into the banking industry since 1991. Australia's banks are faced with Adollars 30bn of non- performing loans, equivalent to almost 6 per cent of their assets. For their employees, as in Britain, the term 'safe as a bank' no longer means what it once did: the banks have foreshadowed shedding up to 14,000 jobs as they face the tough task of restructuring.

How Australia's banking industry, once one of the most prudent and conservative in the world, came to this sorry state is almost a mirror-image of the roller-coaster path the country's economy took during the heady boom years of the 1980s.

In the post-war years the banks, like the economy itself, grew to solid, respectable status under heavy regulation. When the Labor Party came to power in 1983, Paul Keating, then the Treasurer (finance minister), embraced the world trend towards financial deregulation in his bid to reform the economy. The two centrepieces of Mr Keating's strategy to expose Australia to more competition were his decision to float the Australian dollar in 1983 and to deregulate banking the following year, which saw the government grant operating licences to 16 foreign banks.

The climate of competition coincided with the emergence of 'new money' entrepreneurs who were building empires based on borrowing against speculation in asset price increases. The recipe proved a disaster for which the banks are still paying.

Desperate to maintain and increase their market share, the Australian banks willingly threw billions at Alan Bond, Robert Holmes a Court, John Elliott, Christopher Skase, Warwick Fairfax and others whose fantastic empires are now in ruins. The 'collective madness', as one banker has dubbed the era, extended to the outback as well, where stories are still told of local bank managers doing deals with bullish farmers in country pubs, with few, if any, questions asked.

During the early 1980s, bank loans in Australia increased at about 14 per cent a year. By 1990, they were increasing at 40 per cent. With the onset of the worst recession in 60 years, and a shattering fall in asset and commodity prices, the whole edifice came crashing down. When the dust had settled, bad management and poor loan judgement, particularly in the debt-ridden state banks, were shown to be as much to blame as the economic downturn.

Nowhere have the problems been more spectacular than at Westpac. Australia's first bank, founded as the Bank of New South Wales in 1817, it changed its name against vigorous customer disapproval to Westpac (for Western Pacific) in 1982 on the cusp of a drive to expand beyond its Australasian base, especially into Europe and the US. By late last year, the bank was engulfed in crisis.

A disastrous rights issue in September - 73 per cent of the shares were shunned by investors - led to the resignation in October of Sir Eric Neal, the chairman, and four other directors. In November came the shock revelation of a dollars 115m ( pounds 77m) tax liability in the US.

As the Westpac share price fell to an eight-year low, enter Kerry Packer, cash- rich from asset sales that had turned his Sydney-based media company, Consolidated Press, into a Adollars 2bn investment house.

Mr Packer spent Adollars 500m buying Westpac shares in November, making him the bank's second-largest shareholder, and was invited to join the board along with Al Dunlap, the American chief executive of Consolidated Press. Three weeks later, Frank Conroy, Westpac's managing director, quit, an apparent casualty of Mr Packer's arrival.

The abrupt resignation last week of the Packer-Dunlap duo from the Westpac board, after formally joining it on 6 January, is thought to centre on opposition from other directors to Mr Packer's desire to have Mr Dunlap - nicknamed 'chainsaw' because of his ruthless record in corporate restructuring - in the driver's seat at Westpac. The bank had already announced a 'recovery programme' involving drastic cuts to costs, loans and jobs, but its pace and scope were not sweeping enough for Mr Packer's liking.

Fireworks are expected at today's annual meeting, where shareholders will be demanding an answer to the million-dollar question - will Mr Packer retain his Westpac shares or walk away, throwing the bank into more chaos? He is not a man to take a passive role in enterprises over which he has no control.

The shake-ups at Westpac and elsewhere, involving branch closures, revamped technology and the introduction of 'user-pays' charges to recoup the losses of the Eighties, is already producing a far leaner industry in the Nineties. There has been no wholesale closing of doors as there was in the crisis of 1893; but public disenchantment with the system is almost as great.