Mutual banks on the cusp of capital liberation

COBA chief executive Mike Lawrence believes large credit unions and mutual banks are poised for a new era of accelerated growth under proposed capital reforms announced by the Morrison government.

Assistant Treasurer Zed Seselja yesterday called for public comment on planned changes to the Corporations Act that would remove capital restrictions constraining the lending capacity of scores of customer-owned lenders such as CUA and People's Choice CU.

The reforms would allow customer-owned entities to raise Tier 1 capital through the issue of special capital instruments.

Under current rules, mutual deposit takers can only meet their prudential capital requirements by preserving a higher proportion of their retained earnings than for shareholder-owned banking rivals.

Passage of the draft legislation would draw the curtain on a decade-long campaign by mutuals to widen their capital generation options, putting them on a more equal footing with listed banks.

"This is an important reform that will ensure our sector has greater access to capital, which is critical to our capacity to grow," Lawrence said.

"This legislative overhaul is a fundamental endorsement of the customer owned model and it will help boost competition in the banking sector and provide greater choice for consumers."

The proposed legislation is almost guaranteed passage through both houses, given that the Labor opposition was the first major political party to support removing capital restrictions on mutual ADIs.

The draft legislation released this week is intended to be the first phase of a reform program aimed at helping mutual ADIs compete against the major banks.

Apart from overhauling the capital rules applying to mutual banks, the reform program is significant because it will also officially recognise mutual organisations in the Corporations Act for the first time.

This will clarify the property rights of members of customer-owned entities, who since Federation have lacked constitutional certainty about their legal status as "owners".