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Connexus : Issue 39
CoverStory 36 Connexus source of capital. For mutuals to sustain and increase growth in the medium to longer term we need work able additional capital options. This absolutely needs to be part of a robust prudential approach, but we can’t have mutuals lose out just because Basel III has been designed for listed inter national bank s.” Genovese believes some t ype of member invest ment share – which have provided a valuable source of core Tier 1 capital for some European mutuals in recent years – must be on the agenda in Australia. “Getting your members to potentially invest in your credit union is something we’ve talked about for a long time, and there are a few [institutions] that have played around with it. But I think it’s a real option.” Stronger -than-expected demand for ANZ’s r ecent hybrid preference share offer is instr uctive, says Genovese. He notes that the bank raised $1.5 billion – well up on an initial offer size of $500 million. “People will invest in ADIs that are regulated and that they have a relationship with. They see it as a sound investment versus sticking it into equity markets, super funds and growth funds.” Williams says that, regardless of APRA’s policies, the onus under Basel III will be on mutuals to keep lifting their game and come up with new strategies to ensure their competitiveness. “This is a competitive business and if you’re not prepared to enhance your sophistication and innovate, then you’re going to struggle to stay relevant.” Abacus agrees, pointing to the stability and security of these capital instruments and their consistency with the Basel III objectives on captial. Magin says his building society is internally prepar ing for the introduction of the Basel III reforms and factoring in short and long-term goals that take into account the new capital adequacy ratios. In the meantime, he says, it is cr ucial for the sector to keep pressing APRA to recognise and accommodate the mutual model in the regulator y capital framework. “ The one thing I think the mutual sector needs to concentrate on is trying at ever y opportunity to lobby APRA and the government to try to get some carve-outs for the mutuals.” Cameron Cooper is a freelance writer. Mutuals should bear in mind that the Basel III reforms are only part of a wave of imminent regulatory changes, says financial risk management expert Paul Lichtenstein. “They all dramatically impact on the mutual sector and financial services more broadly,” says Lichtenstein, a partner at KPMG’s Advisory Group who works with clients on regulatory issues. New privacy legislation, recovery and resolution planning , credit reforms and the release of the draft Foreign Account Tax Compliance Act laws in the United States are all likely to be on the agenda. “It ’s important for mutuals in particular, given that they are generally smaller and resource-constrained organisations, to consider the broader regulatory landscape and not simply focus on the details of Basel III. It ’s about looking at a portfolio approach to regulatory change.” Basel III presents pros and cons for mutuals, he says. On the negative side, it doesn’t discriminate between a standardised or advanced measurement approach to banking in the way Basel II did. “ The requirements apply to everyone in terms of lifting the overall level of capital.” He says most mutuals adopt a standardised approach, so they don’t necessarily have the same risk levers available to them to manipulate their portfolio or adjust the risk drivers as readily as some of the bigger banks. This ultimately flows through to their capital requirements. In mutuals’ favour is the fact that Basel III focuses on improving the quality of capital, he says. “There’s a much greater focus on Tier 1 as opposed to Tier 2 capital. Mutuals are generally more focused on the Tier 1 side and have relatively stronger Tier 1 positions. That’s in favour of mutuals because they don’t have the same level of subordinated debt or other capital instruments that the banks have which may no longer be counted as capital.” Despite mutuals’ concerns that Basel III will impose additional buffers on already high capital adequacy ratios, Lichtenstein says the jury is still out on the issue. “Nobody can be definitive on that yet. We don’t know exactly how it is going to play out. What we are certainly seeing in the market is that APRA is focused more on the supervisory process and oversight of the mutuals, as opposed to simply the letter of the law minimum capital requirements. It will vary enormously based on how the mutual has responded to improving their internal risk management.” Lichtenstein says it’s a “reasonable concern” that new capital rules may limit hybrid funding options and stall mutual efforts to become a fifth banking pillar. But wait, there’s more People will invest in ADIs... they have a relationship with.