This article reviews developments in the New Zealand banking industry over the year ended December 2002. It discusses some of the structural developments in the banking system, policy initiatives in the banking supervision area, and the financial condition of registered banks. Given the importance of the Australian banking system to New Zealand, the article includes a discussion of the Australian banking system, with particular focus on the major Australian banks. The information available on the New Zealand and Australian banking systems suggests that both systems continue to perform strongly. For an assessment of the non-bank financial sector in New Zealand, the reader is referred to the companion article in this Bulletin: "Financial intermediation beyond the banks: recent developments".