How would you explain the recent decline in the size of the building society industry? Building societies were originally set up to pool small deposits from individuals and households in order to finance mortgage lending. Residential home ownership was highly desired by Australians and as it was difficult to obtain home finance from banks in the regulated environment, building societies were able to fill the breach and thrived.
With deregulation of banks and the growth of the securitised mortgage market, the value of the intermediation function performed by building societies and credit unions (funnelling small savings into home mortgage lending or shorter term lending) was eroded by competition. Deregulation of the financial industry freed the banks’ capacity to extend home loans to individuals, which resulted in increased competition from the banking sector, making it more difficult for NBFIs to survive in their previous form.
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As a result many smaller societies and credit cooperatives have merged, while larger building societies converted to banks, allowing them to offer more services (although more recently building societies have been able to expand the range of services on offer) and giving them instant access to clearing house funds. This conversion from building society status to bank status resulted in an overall loss in market share for building societies. 3. What are the similarities and differences between the three major groups of authorised deposit-taking institutions in Australia?
The two main types of savings FIs in Australia are building societies and credit unions. Generally, both began life as cooperative organisations regulated under state or territory legislation (building societies can issue share capital but are mostly operated as cooperatives). However, with regulatory restructure in the late 1990s, both are now regulated in the same way as the banks – by APRA. Credit unions tend to provide short-term finance. Credit union members are usually linked by a common bond such as an employer or profession, which is not the case with building societies.
Membership of a credit union involves the purchase of one redeemable share for a nominal sum, whereas building society membership is open to anyone who opens an account. Until 1994, the significant difference between credit unions and building societies was credit unions’ tax exemption on interest paid to non-corporate depositors. However, this tax exemption was removed in July 1994. Building societies tend to focus more on longer term lending – although the difference between the two groups in lending maturity is now far more blurred than when they were originally established.
Banks are the third type of DI in Australia, and banks tend to be far larger than building societies or credit unions, and are established under the Australian Banking Act 1959. Banks generally also have a far broader range of financial services than either building societies or credit unions, as they can leverage their size and distribution networks effectively. All Australian depository institutions are regulated by APRA and the regulation imposed is the same despite their differences. 4. Contrast the activities of the four major Australian banks with those of the regional banks.
The four major banks have a national focus and offer banking at corporate and retail levels, not only throughout Australia but also overseas. Many of the regional banks were building societies which converted to banks and thus tended to conduct their activities within the confines of the region or state where they had traditionally operated. More recently the regional banks have started to expand across state borders, moving away from their traditional markets. Owing to their origins, the assets of the regional banks have been predominantly in residential housing loans.
The large banks have been able to enhance their margins by offering a full range of services to retail, small and large corporate customers. Owing to their national focus, they can access funds more cheaply than the regional banks and can often offer funds to their customers at a slight premium because of the additional services provided. The large banks also have greater access to the international markets for funding because of their size and consequent reputation – which is often a key factor in the Euro-markets for example. 5. How has the regulation of banks changed over the last decade?
Prior to the Campbell Inquiry in 1980 the RBA controlled both interest rates and exchange rates. This was found to cause inefficiencies in the financial system. As a result of this inquiry regulations restricting operation of banks were dismantled, leaving banks free to decide on the interest rates they would charge. At the same time the RBA’s focus changed from controlling the banks’ activities to prudential supervision. It was not until 1985 that the broad principles of prudential supervision policy were finally agreed between the RBA and the Treasurer, and documented in the first RBA Prudential Statement.
These made the RBA responsible for setting minimum prudential standards as a guide to bank management. Responsibility for prudential management lies with the banks’ management, while the RBA’s role is to ensure it is carried out effectively. In 1998, regulation of the financial services industry was restructured, and the Australian Prudential Regulatory Authority (APRA) was established to supervise the aspects of banking previously covered by the RBA, including: •ownership and control •capital adequacy •liquidity management, including prime asset requirements banks’ large credit exposures •providing guidelines on the association with non-bank financial institutions •off-balance-sheet activities •external auditors 6. How has the regulation of building societies and credit unions changed over the last decade? Until 1992, building societies and credit unions were regulated by their respective state governments. The regulation was developed in a fragmented fashion and created inconsistencies across states. The state governments took steps to reform the regulation of NBFIs following the collapse of a number of prominent building societies.
Uniform legislation was developed in conjunction with the RBA and a national regulatory organisation established, the Australian Financial Institutions Commission (AFIC). The result is that today a two-tiered system operates whereby the states supervise building societies and credit unions on a day-to-day basis within the states and, at a national level, uniform standards and practices are coordinated through AFIC. However, following the Wallis Inquiry, and the restructure of the regulation of the financial services industry in the late 1990s, AFIC was abolished and its functions rolled into the newly formed APRA.
Since its inception in 1999, APRA has worked towards a policy of regulation harmonisation across the financial services sector. There is now uniform regulation of all DIs authorised to operate in Australia – i. e. all banks, building societies and credit unions. 7. What are the major components of the Financial Services Reform Act 2001? The key reforms undertaken in the Financial Services Reform Act 2001 (CLERP6) included: •Uniform regulation of financial products •Licensing of financial services providers •Financial service provider conduct and disclosure regulation •Licensing of financial product markets Other reforms included licensing of clearing and settlement facilities, compensation arrangements to protect participants against loss caused in defined circumstances during the execution of a market transaction, and a general prohibition on misleading and deceptive conduct in dealings in financial products and the provision of financial services WEB QUESTIONS 8. Go to APRA’s web site and find the latest information on Australian bank, building society and credit union asset concentration. Go to the APRA web site and click on ‘Authorised Deposit Institutions’, and then on ‘Statistics’.
You can then go to the various statistics for each of the ADIs – i. e. ADI Quarterly Performance Statistics for banks, building societies and credit unions. 9. Go to the RBA web site and update the balance sheets shown in this chapter for banks, building societies and credit unions. Go to the RBA web site and get the latest data for Tables 1. 4, 1. 7 and 1. 8. The answer will depend on the date of the assignment. The web site is http://www. rba. gov. au. At the web site, click on ‘Bulletin Statistical Tables’. Find Tables B2 and B7 and B8 and download the relevant data.