The post-war regulatory system sought to achieve its monetary and supervisory goals through direct restraints on the activities of banks. The regulatory regime in place during this period restricted banks' operational flexibility and their ability to compete. For example, interest rate ceilings on deposit accounts restricted banks' ability to attract funds. Similarly, lending was restricted through guidelines on trading bank approvals. Savings banks were constrained in their ability to lend for housing by the requirement to hold a majority of assets in cash, government securities or deposits with the central bank.The role of NFBIs grew to fill the gaps caused by restraints on banks - for instance merchant banks to service corporations and building societies to service the home lending market. Not only did the market share of commercial banks decline over the period 1955 to 1980, but bank assets declined as a share of GDP. This had important implications for the conduct of monetary policy, which relied on direct controls on banks, and also caused concerns from a prudential perspective.The Australian authorities were conscious of this trend at an early stage and a number of steps towards deregulation were taken during the 1960s and 1970s in an effort to bolster the position of banks and to begin to establish means by which influence could be exerted on the broader financial system. For instance, maximum rates on large overdrafts were removed in 1972 and interest rates on certificates of deposit were freed up in 1973, allowing banks some scope to manage their liabilities. However, regulation was very much focused on the domestic market and competition among domestic institutions.Freeing up regulation in some areas, however, had the effect of increasing pressures on the regulations that remained. By the 1970s, these pressures were being aggravated by the increasingly interest-sensitive nature of capital flows - largely reflecting the establishment of merchant bank subsidiaries of foreign banks, which had access to funds from their overseas parent organisations. These volatile capital flows, together with a pegged exchange rate, complicated efforts to control domestic liquidity and aggravated the effects of differential regulation between various parts of the financial system. The need for the central bank to fund any shortfall in raising government debt as a result of inefficient debt-raising mechanisms added to problems with liquidity management.