Restructure of Credit Unions, Building Societies and Other NBFIS Into Banks: FIN203 Banking and Finance
Topic:
Assessment of selected non-bank financial institutions (building societies and credit unions) in Australia, post deregulation of the financial sector, and in the light of the recent Royal Commission into sector misconduct.
Task Details:
The number of building societies and credit unions in Australia has been steadily declining since the deregulation of the Australian financial sector. In the most part this has been due to the quest for scale, with institutions merging to create bigger ones. In recent years, however, some of these institutions have restructured into banks (for example, Defence Bank and Heritage Bank).
Research these and other institutions that have changed from building societies/credit unions into banks and determine the rationale for this change. Also consider the implications of this trend for the remaining non-bank financial institutions, and whether the trend should be allowed to continue. Furthermore, in the light of the negative finds contained in the interim and final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, recommend to the government whether or not building societies and credit unions should be allowed to continue changing into banks.
Research Requirements: Students need to support their analysis with reference from text and a minimum of six (6) suitable, current and academically accepted sources -check with your tutor if unsure of your sources. Students seeking Credit or higher grades should support their analysis with an increased number of reference sources consistent with the grade they are seeking.
Solution
Executive Summary
This research report is based on an evaluation of the role of non-bank financial institutions and their response to the changes and transformations that incurred in the financial system of Australia. The first key section of the research report is the literature review in which it has been evaluated how the deregulation incurred and who the credit unions and building societies responded to those changes. The issues interim report of the commission in the context of the non-bank financial institution has also evaluated, and key issues are identified. The next section of the report is based on the conduction of analysis on the response of the credit unions and building societies to the deregulation of the Australian financial system. Based on the evaluation section, recommendations were provided regarding whether the credit unions and building societies continue their conversion into the bank.
Introduction
Credit Unions and Building societies are considered as good for small and medium businesses. Credit Unions are controlled by their members, and they are considered people oriented. Building societies are also owned by their members and they deal the mortgages as the main products of lending, but it is like a bank in some services. The key area of consideration in this research report is to evaluate that how and why the number of credit unions and building societies in Australia has been declining steadily since deregulation that occurred in the financial sector in Australia. The economies of scale are the main factor due to which the credit union and building societies were merging into banks. Heritage Bank and defense Bank are two examples of institutions that restructured into a bank (Viney & Phillips, 2015).
Literature Review
Building societies and credit unions are traditionally owned by their members or customers while in comparison to it, shareholders owned the banks. The main purpose of the development of building societies and credit unions was to help the workers get access to bank services on a non-for-profit or mutual basis. The rates and fees of these institutions were lower than the larger institutions because their primary objective was to serve the members. Loans and saving accounts are some of the important traditional retail banking services that are offered by these ADIs. The example of building societies is Newcastle Permanent Building Society Limited and Credit Union Australia Ltd is an example of credit unions. A non-bank financial institution is considered as those intuitions which do not hold the license of banking, but they offer certain types of loans and mortgages (Moradi & Babacan, 2015).
Deregulation of the Australian financial Sector
The deregulation of the Australian financial system began in early 1980. Before that deregulation of the financial system, there were three different products which were allowed to be an offer and their prices were allowed to change. This was the main context in terms of which the banks were regulated before the 1980s. The competition among the banks was based on improvement and development of services such as the development of an extensive branch network to gain competitive advantage. This was the reason that the credit as limited through direct controls. At that time, it had observed that the market share at the expense of banks of NBFIs (Non-bank financial institutions) was increasing because of the reason that there were less strict and limited regulations regarding the NBFIs. The monetary policy was implemented based on these factors, and the important point regarding monetary policy is that it was based on the control of the banking sector (Berg, 2016). In this way, the market share of banks declined in the 1960s and 1970s as a proportion of the financial system. The Campbell Committee issued a report in 1979 based on which key revolution in the financial system of Australia was started (Westpac Banking Corporation, 2019).
The main factor of consideration of deregulation was to increase the effectiveness of the monetary policy and to eliminate and remove the inefficiencies existed in the Australian financial system. The inadequacies existed in the financial system because of the diverse and different types of regulations for the NBFIs and bank’s treatment. At the start, the ceilings of the interest rate regarding the deposits in the bank were removed, and those restrictions which were based on the maximum and minimum deposit terms were also removed progressively at the end of the completion of the process in 1984. This is the reason that based on the deregulations, the market shares of the banking industry were increased, but the important aspect was that the increase in the market share of banks did not result into the decline of the assets in other financial institutions. But the largest share was gained by the banks because of the increase that incurred in the depth of the financial system (Avkiran, 2000).
Restructure of Credit Unions, Building Societies and Other NBFIs into banks
The main purpose of the creation of building societies and credit unions was to pond small depositors from the households and individuals for giving them an opportunity of financing mortgage lending. The Australian at that time were giving them a high level of priority to have ownership of residential home, but in the restricted regulatory environment of banks were making it difficult for the Australian to obtain loan from banks (Bagus & Howden, 2013). But it had seen that the credit unions and building societies were able to fill they thrived and breach. The value of the intermediation function was started performing by the credit unions and building societies because of the growth of the securitized mortgage market and deregulation of the financial system. This deregulation of the financial industry has increased and extended the capability of banks to give diverse types of loans to individuals due to which the survival of NBFIs became difficult to work in the previous forms. This was the main reason for the merger of credit cooperatives and many smaller societies while in contrast to it, based on the objective of offering more banking services, most of the bigger building society transformed into banks. The conversion of building societies and credit unions into banks has decreased the market share of small credit unions (Jain et al., 2015).
Issues relating to the interim report of the royal commission
Some of the key issues identified in the interim report of commissions are given below:
- In the context of the consumer lending, it had pointed out that fraudulent document was used by the lender, there was a certain level of the administrative and processing errors, and there was a certain level of the breach of obligations degrading the responsible lending.
- In the context of the financial advice, some of the significant issues identified in the report include the inappropriate conduct by the advisors, charging higher fees by the advisors or licensees to the client for giving financial advice, provision of inappropriate advice was another key issue, and the disciplinary procedures were not adequate.
- The issues regarding the small and medium enterprises included the use of inaccurate, incomplete, and false information, unsuitable lending, and provision of guaranty of a third party (Hayne, 2017).
Analysis
Based on the consideration of literature of rationale for the restructuring of the credit union, building societies, and other NBFIs into banks it is evaluated that a decrease occurred in the number of NBFIs from the period 2007 to 2017. The number of NBFIs was 2017 in 2007, but it has decreased to 147 at the end of the year 2017. This shows that there was a 32% decrease occurred in NBFIs because of the deregulation of the financial sector in Australia. The most important reason of the reduction of the credit unions and building societies was a trend that started to convert these institutions into mutual banks and merger was also the main focus of these institutions for the improvement of competitive advantage and for gaining the economies of scale. The analysis of the decrease that occurred in the credit union and building societies, it has been pointed out that at the end of the year 2017, there were only 54 credit unions were operating in Australia. The decreases in the building societies have noted as 4 in the year 2017, which were previously 14 at the end of the year 2007. The increases in the number of banks were started in the year 2011 because the market analysis revealed that during the year 2011, the substantial increase occurred in the number of Australian domestic banks (Bell & Hindmoor, 2018).
There are two categories of Banks in Australia. The first category is the mutual bask which works based on the objective of providing products and services of lower cost, and another category is the Publicly Listed Banks which work based on the objective of generating profits for their shareholders. It has been evaluated that there is different reasons based on which the trend of the merger of building societies and credit unions into mutual banks is occurring. Competition is considered the main factor, because the conversion to mutual banks is to become bigger to gain a competitive advantage in the market. The financial industry after the deregulations has increased the demand for broader ranges of the products and services, the need for meeting the legal and regulatory obligations and cost of technological changes. All of the Mutual Banks, Mutual Building Societies and Credit Unions in Australia are considered as the ADI’s (Authorized Deposit Taking Institutions) because all of these are regulated in Australia in the similar ways other banks in Australia are regulated (McLeay et al., 2014). Based on the perception and response of the customers, the customers think that the range of the products and services along with the expected security are provided by the banks, not by the Credit Unions and Building Societies.
According to the regulatory requirements, an ADI must have $50 million in assets for using the term bank. Therefore, meeting this capital adequacy difficulty is the main reason for the merger of smaller Credit Unions and Building Societies. The main factor that attracted the members of the credit union and building societies to vote for the extinguishment of member rights and merger in the context of transforming to banks was that if the availability of wider ranges of opportunities. In this way, the members of these institutions were thinking that eligible voting members’ rights would open the opportunities of becoming the shareholders of the mutual bank which is not available in the running as a credit union and building society. The voting rights which would be gained by becoming the shareholder of the mutual bank was another important factor based on which the credit unions and building societies were merging into banks. There were huge opportunities available based on voting rights in terms of future of the organization, structure, and governance (Akhtaruzzaman & Shamsuddin, 2017).
In the interim report of the commission, two general issues were identified which extended across all the sectors of the Australian financial industry. These issues include the area of regulators and remuneration, governance, and culture. The report identified that charging high fees was one of the important issues in the banking sector. Therefore, in this perspective, according to the report, there were two types of issues that existed in the direct lending by banks. The first issues were based on compliance with the existing norms of conduct and issues regarding the need to make a change in the current norms. The key areas of making changes and improvement identified in the report included the need for changes in the regulatory regime. It has been evaluated that there was complication associated with its current regulatory regime. To manage the issues of the banking industry, it is important to impede regulatory enforcement and effective risk management. Another area of focus identified by evaluating the final interim report was the requirement for potential reform policy for developing applicable regulations and context-specific approach. The development of context-specific approach was to enable the banks and borrowers to deal with the consequences of unforeseen and uncontrollable external factors and events (Commonwealth of Australia, 2018).
Recommendations
In the context of the interim report, it is recommended that there is a need of making a certain level of changes in the traditional banking sector of Australia because there was a certain level of the issues that should be eliminated and managed. It is recommended to apply the laws because it will help in the management of all the lending issues identified in the interim report of the commission. The key area of making reform is the other aspect of home lending, such as structures of remuneration associated with home lending and the roles and responsibilities of the mortgage brokers.
It is also recommended to make a certain level of reforms regarding the accessibility of banking for all the people of Australia. It is recommended to the government of Australia to focus on making reforms in those areas which could affect the customers such as the development of standards for both the banks and non-bank financial institutions in the context of charging default interest and valuations of the loan.
It is recommended to the government of Australia in Australia to ensure that all the credit unions and building societies which are providing banking services can use the term bank. It is very important for gaining economies of scale that all the NBFIs should have the option of using the term bank or banking because these institutions also provide banking services. The limitation of using the term bank should be removed by the government to encourage the credit unions and building societies that they can survive without converting or merging into banks.
Another important recommendation is to allow the use of building a society or credit union by the mutual bank. After the conversion to banks, the institutions are not allowed to use the term of the credit union or building society. Therefore, it is recommended to allow keeping the name of the credit union or building a society with a mutual bank.
Conclusion
It is concluded that building societies and credit unions provide a similar level and types of products and services to customers as they get from the banks. Some of the main products and services of building societies and credit unions include insurance, loans, and savings accounts. It is also concluded that both the building societies and the credit unions are owned co-operatively, which means that on opening an account, an individual could become members of these institutions. It is concluded that the deregulation of the Australian financial system has created a change in the operations of the credit union, building societies, and other NBFIs. The focus was diverted towards merging into larger banks because of the reason for larger growth opportunities in operating as banks rather than to be operating as building a society or credit union. Some of the important issues in the financial industry were identified by the interim report of the royal commission. Based on these issues identified recommendations are given to the government whether building societies, credit union and other NBFIs are allowed to continue transforming into banks.
References
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