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Connexus : Issue 39
26 Connexus CoverStory Growing pains Mutual ADIs and APRA have “put their thinking caps on” about future capital instruments under the Basel III regime. By CAMERON COOPER W ith a new capital regime looming under Basel III, there is deep concern the reforms are biased against the mutual model and could seriously hinder effor ts to boost the mutual sector’s share of the Australian banking market. APRA’s willingness to recognise and accommodate the mutual model in the new capital regime is critically important. In a welcome response to submissions f rom Abacus, A PR A acknowledged some of these challenges when releasing revised standards in late March. APRA Chairman Dr John Laker promised that the prudential regulator: “Will work closely with mutuals on the particular challenges that the Basel III measures... pose for that sector”. Abacus has welcomed this development but has flagged the fact that much more work is required to make Basel III “mutual friendly”. “Our opportunity is to engage with APRA on the issues that both regulator and industry agree aren’t workable for mutuals,” says Abacus CEO Louise Petschler. “This initial recognition from APRA is a great result, but there are many more issues that we need to bring to the table. For some of these our work will be more of a marathon than a sprint.” What’s the trouble with Basel? Complying with Basel III is not an immediate challenge for the strongly-capitalised mutual ADI sector. Dr Laker’s message to delegates at the 2011 Abacus Convention made this clear, noting that the Basel III package had arrived at their doorstep and they could: “Open it with confidence. There is nothing inside ticking away for mutual ADIs!” However, with the reforms set to impose tougher rules on how much capital financial institutions are required to hold, chief executives and treasury officers at many mutuals are not so sure. They fear requirements for higher capital adequacy ratios (CARs) and tighter definitions of capital will inhibit their growth prospects at the ver y time when politicians and the community are urging mutuals to expand. Some smaller institutions, such as Holiday Coast Credit Union in NSW, have been innovator s in sourcing capital through means other than retained earnings. “ We’ve never had the luxury of having surplus capital,” says CEO Neville Parsons. Conscious of that fact, he shares concer ns w ith other mutual CEOs that the Basel III changes will