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Connexus : Issue 39
www.abacus.org.au 31 Abacus is calling on APR A to accommodate mutual structures by having its Basel III standards: • Incor porate a workable definition of mutual common equity into the standard, noting the different nature of caps on dividends of mutual investment shares and member shares. • Adjust restrictions on conversion to unlisted equity for mutuals. • Accommodate options for mutuals to allow for conversion of additional Tier 1 and Tier 2 capital instruments in non-viability scenarios. • Take into account mutuals’ capital raising constraints when applying capital buffers. Petschler agrees with APRA’s view that mutuals will have no trouble initially complying with the new capital rules. “ This is a strategic issue about our ambitions to become a larger player and to grow.” CEO concerns As regulators in jurisdictions such as Europe and Canada consider Basel III concessions for mutuals, there are calls for APRA to follow suit in Australia. Among the mutual chiefs approached by Connexus, there is consensus that a strict interpretation of the Basel III rules will place even greater pressure on their institutions to tie up capital. At Greater Building Society in Newcastle, the treasur y team typically sets minimum capital requirements of about 11.5 per cent, although it is cur rently holding reser ves at about 16 per cent. CEO Don Magin says there is still some uncertainty over the base rates APRA will set for individual financial institutions. “ In the past the base has been higher for mutuals than it has been for the major bank s,” he says. “ So if we’re starting at a higher base and then we’re seeing some of these buffer s being added, it’s quite possible that our minimum could go from what we are today to something like 15 per cent. And that’s the concern.” The trials of Holiday Coast Credit Union are a clear reminder of the funding challenges credit unions and building societies face. In the early 2000s, the NSW credit union secured a supply of Tier 1 capital after gaining approval to issue $5 million of irredeemable non-cumulative preference shares. Then, last October, with $1.8 million still available to issue, it sought to raise more capital through the member investment securities. “ We prepared an offer information statement and lodged it with the Australian Securities and Investments Commission,” says CEO Neville Parsons. “ Then we withdrew it in early January when APRA said in its current provisioning and wording that it would not meet regulatory capital.” His frustration is that “it’s exactly the same instrument that we already have on our book”. A solution to this “roadblock” can hopefully be found whereby Holiday Coast has a chance to raise more capital and retire some of its subordinated debt. Parsons says the funding avenue is “about as pure as you can get” in terms of meeting regulatory requirements, and it will be a worrying sign for smaller mutuals such as Holiday Coast if such capital options are rejected. “I fear for what options mutuals have if we can’t get the pathway through the forest for approval of these [instruments].” Abacus CEO Louise Petschler agrees that Holiday Coast’s member investment securities are “incredibly safe additional Tier 1 capital”, and the industry body and mutuals are racking their brains to find new ways to raise capital that don’t undermine ownership structures but satisfy regulators. Some credit unions and building societies have been negotiating with APRA over the possibility of raising funds through an aggregation model, with chairman Dr John Laker saying the watchdog “has no in-principle objections to innovation in this form”. Hume Building Society has not had significant capital concerns in recent years, but it has joined a group of mutuals seeking to raise some subordinated debt as a ‘just-in-case’ strategy. “ There’s now initial work being done as to how we design something that might have appeal to investors and still satisfy APRA’s requirements – and that looks to me like a nigh on impossible task,” CEO Andrew Saxby says. Greater Building Society CEO Don Magin says United Kingdom mutuals are offering permanent loss-absorbing deferred shares (PLADS), a hybrid instrument designed for direct issue into either wholesale or retail markets. “ Now they’re fine, and because they’re loss-absorbing, they can be treated as capital,” he says. “The issue is that, if you know you’re going to be incurring a loss if something goes wrong in an organisation, then you’re going to demand a much higher rate, so the rate at which they’re being offered is just uncompetitive.” At Maritime, Mining & Power, CEO Mark Genovese believes Basel III will make it harder to deal with issues such as loan loss reserves and pricing competitiveness. “ There are no specific answers yet, but the pleasing thing is that Dr Laker has announced publicly that he is keen to listen to options from the industry. Now it’s over to us.” Funding fears ...the changes could stymie the ability of mutual ADIs to grow... CoverStory