The Australian Prudential Regulation Authority has, for the first time, amended banking system rules to recognise the unique attributes of the mutual banking model, in a move that will provide credit unions, building societies and mutuals with more scope to fund their growth and manage capital levels.
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The decision reflects a shift in APRA's approach to banking regulation in that the regulator has traditionally applied the same standards to mutuals as other banks, despite mutuals' peculiarities, such as the absence of listed shares.
The Basel III capital rules, implemented by APRA 16 months ago, reduced the capacity of customer-owned banks to issue regulatory capital instruments because without listed shares there was nothing for these instruments to convert to in a time of crisis. Without conversion clauses regulatory capital instruments issued by mutuals were not able to satisfy the requirements for common equity tier 1 capital, which is the key number monitored by global regulators.
APRA will now recognise a new instrument, to be known as a ''mutual equity interest'', which will be created only when additional tier 1 (hybrids) or tier 2 (subordinated debt) instruments convert in extreme circumstances.
Louise Petschler, chief executive of the Customer Owned Banking Association, said the sector was ''very strongly capitalised and will always rely on retained earnings as its primary source of regulatory capital''. The change ''provides additional flexibility for capital management'', she said.
APRA said it had liaised with COBA and the Australian Securities and Investments Commission ''to ensure that the requirements for the issue of mutual equity interests are practical to implement whilst consistent with the intent of the Basel III reforms and the application of ASIC's guidance'' on mutuals.
It is understood COBA is continuing discussions with APRA to allow customer-owned banks to issue mutual equity interests directly to members, or to retail or institutions, as a way of bolstering common equity tier 1 capital.
Big and regional banks have been highly active issuing hybrid securities over the past 18 months.
In its submission to the financial system inquiry, COBA argues ''competitive neutrality'' - that some providers of financial services do not receive advantages over others as a result of government regulation - is crucial for sustainable competition to be restored in the banking sector.
