Mutuals: the quiet achievers

In APRA Chair John Laker’s speech at the Abacus Convention he described the ‘quiet achievement’ on the part of mutual ADIs as an important source of their strength, notwithstanding “unsettled times”.

He confirmed that APRA will maintain its focus on three main supervisory issues: credit standards, liquidity and funding, and governance.

In respect of funding he made the following comment on securitisation:

self-securitisation … is an arrangement under which an ADI ‘packages’ mortgage loans on its books into an instrument that can be used in repurchase transactions with the Reserve Bank of Australia. Self-securitised instruments are not intended for day-to-day funding purposes but they have proven their worth at times of acute market pressures earlier in the crisis. I mentioned at the 2009 Conference that APRA expected all large credit unions and building societies to establish self-securitisation facilities with the Reserve Bank of Australia as part of their contingency planning. Many have now done so but, to be frank, we have also had some pushback. Some have argued that existing securitisation warehouse arrangements and/or other committed facilities are an acceptable alternative. We disagree. Experience in 2008 was that such arrangements can be unreliable at the very time they are needed. Prudence dictates another instrument in the crisis management armoury.

John Laker also commented on the impact of Basel III on mutual ADIs:

Your one challenging area in Basel III, where we would like your thinking caps on, is the design of capital instruments that might be issued by mutual ADIs. Basel III requires that, to be eligible as regulatory capital, all classes of capital instruments must be capable of absorbing losses at the point of non-viability. At that point, without going into the details, capital instruments must either be converted into equity or written-off. Only the latter appears an option for mutual ADIs.

Bright Law can advise mutual ADIs on funding and capital arrangements as well as issues relating to becoming a mutual bank and other regulatory requirements.

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