Mutual banks managing sector flux

The pace of change in Australia’s mutual bank sector is already dramatic and may be accelerating further. Speakers at the KangaNews Mutual Sector Wholesale Funding Seminar, which took place in Sydney on 29 August, shared perspectives on how the sector is adapting to these shifting currents and emerging challenges.

“What does the mutual sector stand for today? Why are we all here, working within this sector, wanting to produce good results and do our job to the best of our abilities? We all believe in the benefit to Australia of choice in the banking sector – the ability for customers to choose outside of the mainstream banks.”

“Consolidation delivers a lot of benefits but it also brings, in my opinion, quite a lot of risk. These include the risks of realising the benefits of merger. It all looks great on paper, but how do we ensure we thoroughly and properly analyse the costs and the benefits of bringing two already thriving and successful organisations together without completely upsetting the apple cart? We’re really focused on this aspect of consolidation, to ensure we deliver value to our members, people and the broader sector.”
JEN DALITZ QUDOS BANK

“Until we see weaker activity and a weaker labour market, the risk is that services inflation stays higher than we would like. If this component of inflation is high, other parts may have to be squeezed a little more. The challenge of the narrow path the RBA is walking is trying not to tip the labour market too far but still enough that it can get inflation down.”

“This has been the weirdest housing cycle I think anyone has ever seen. There wouldn’t be an economist out there who wasn’t looking for a 20 per cent fall in house prices 18 months ago – interest rates don’t go from zero to 4-point-something per cent without something breaking. But investors have returned to the market and so have first-time buyers. It’s quite extraordinary how the housing sector has performed.”

“The government has set itself a target to build 1.2 million new properties over the next five years. We’d be pretty impressed if it can deliver 70 or 80 per cent of this figure. Meanwhile, something like 70 per cent of household wealth is tied up in the property sector. Insofar as we don’t see some sort of disorderly price adjustment or massive housing crash, ongoing price growth is positive for the consumer and for the household balance sheet.”

“An ADI must ensure it is appropriately managing interest rate risk. This begins with the ability to measure and monitor these risks and report their impact on earnings and capital. It’s equally important to have the capacity to hedge risks in line with a balance sheet management strategy and clear policy guidelines.”

“We want to focus on working out what is reasonable for each type of ADI within this diverse group, because the MLH regime is a key aspect of proportionality in regulation for smaller ADIs. There will be elements of common ground and others of difference within the sector, which is something APRA and the industry will have to work out along the way.”

“One thing mutuals can be certain about in the semi-government market is getting access in the part of the curve they want. There’s a lot of flexibility on offer, whether by duration or coupon type. In fact, I don’t think there is a market in the world that issues the way we do. Our approach to supply has always been one of flexibility and our mantra has always been that we don’t want to add stress to stressed markets.”

“Funding diversification is going to have to happen but it made sense already, purely because the mutual sector is evolving. We talked a lot about this evolution and about diversification last year, for instance. Regulatory developments just cement what we had already articulated.”

“Multiseller structures are not a single thing, and their value probably depends a little on what is trying to be to solved for. A cross-collateralised solution isn’t really the answer if we are trying to solve for contagion in the sector. On the other hand, there might be capacity for centralised structures for operational and cost purposes, such as one that uses series segregated securitisation technology to share operating infrastructure and transaction management but keep credit, assets and services separate for each seller.”

“Ultimately, small banks provide a service to the community in Australia and they are an important part of the financial system. But this also means it is important for them to maintain financial resilience. We are inviting all banks to share this challenge with us.”

“Competition is the realm of the ACCC rather than APRA, but we try to balance stability with a competitive environment. We are also aware that smaller banks provide value to the community. We want our approach to be as proportional and balanced as it can be.”
ERICA SANTOSAPUTRI AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY

“There is discussion about pooling funding arrangements, but it is not a straightforward option. There are legitimate questions about whether the pool is a source of diversity or a source of contagion risk, for instance. It’s like cross-border banking: you can import a problem from overseas, but also a solution. Overall, there is considerable scope to think about agency structures and branding structures – we could even build a federation of banks.”

“It is the responsibility of management, and particularly treasury, to understand interestrate risks because it is a skill that is not widely held across the organisation. We also have a responsibility to educate our management and the board about their obligations – the challenges are becoming wider and more complicated so there needs to be a base level of understanding at board level.”

“I believe we are on the cusp of fintech offerings providing the opportunity for smaller mutuals – and I think this starts with the smaller banks – to elevate their operation into a shared-service model, retaining their branding and strategic markets while having access to the generational uplift in technology that none of us can afford on our own.”

“Building scale is one solution to the sector’s challenges and mergers are clearly part of this. But there are other paths to dealing with regulatory change, which could include changing and modernising banking systems, as well as automation.”