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Connexus : Issue 39
CoverStory www.abacus.org.au 35 application of the non-v iability principle to such instr uments. The non-viability clause mentioned earlier is a real sticking point for mutuals. “Our members have told us this would kill off options to raise additional Tier 1 captial,” Petschler says. “ If our only option is wr ite down, while our competitors have conversion options, then clearly any instrument will be commercially unrealistic. Who would buy it?” Her itage Bank chief treasur y and business strategy officer Paul Williams also questions APRA’s initial proposals on non-viability. “This would mean a mutual ADI is writing off Tier 2 capital at a point technically before the business is a gone concer n,” he says. “ If you’re an investor and you have an opportunity to buy a secur ity issued by a major bank that conver ts to equity and then gets government support, ver sus a similar product issued by a mutual where the principal is permanently written down at the same point, then you’re going to put your money with the major bank secur ity in the hope that government support will provide an oppor tunity to recover any losses.” APRA’s claim that mutuals will not have a problem complying with new CARs is based on a “histor ical focus”, says Williams. But he adds that the regulator y rules are “skewed in favour of traditional equity-style capital”. “So implicitly, APRA is saying profitability needs to be more important for all mutuals going for ward.” Fifth pillar notion With gover nments keen to herald mutuals as a new pillar of the banking competition, the issue of greater market competition should be a strong factor in suppor t of accommodating credit unions, mutual banks and building societies in the regulator y capital framework. Parsons, for one, believes prescr iptive regulator y decisions that may stifle the sector are at odds with such a notion. “ It’s all right for the politicians to talk about a fifth pillar,” he says, “but when you actually get to the crux of it, [mutuals can thrive] only if we can grow our capital to underpin growth to enable us to expand and absorb more bank customers. But to do that we have to have another source of capital other than retained earnings.” Parsons says that, without such funding options, mutual principles could be lost as credit unions and building societies are forced to become “nothing more than a bank with exorbitant fees and charges and the like”. Magin and Saxby agree the fifth pillar concept is looking shaky unless Basel III defi nitions allow mutuals to raise some for ms of additional Tier 1 capital. “ There has seemed quite a difference between where APR A’s heading on this and where the government is publicly announcing what it wants to see happen,” says Magin. “The initial standard would force our costs up and make us potentially less competitive.” Says Saxby: “ Without the ability to grow much quicker than we have been, individually and collectively – no, I don’t think it’s realistic to call us a fifth pillar.” lobbying focus In its negotiations with APRA, Abacus has argued the importance of the regulator using ‘national discretions’ when rolling out Basel III. This allows APR A to adapt cer tain r ules for mutuals, for example, to take into account their structure and characteristics. Petschler says lobbying efforts will focus on “mutual friendly” capital definitions that remain consistent with Basel III philosophies, along with an insistence on capital buffers that don’t create unintended stress on mutuals compared to listed ADIs. “ The end result of not solving this problem is that retained earnings would be the only Hume has been able to GRoW at an acceptable rate while maintaining APRA- approved CARs of about 14.1 to 14.5 %