Some CUBS dependent on a few large depositors

APRA chief John Laker used a talk to the Abacus conference in Brisbane on Tuesday to stress the need for credit unions and building societies to put even more effort into modelling their cash flows and planning their strategies to attract a stable flow of deposit funds. APRA published the speech at its website yesterday.

In a talk laden with the lessons from the financial crisis of the last year, Laker found himself repeating some themes from the corresponding talk at the Abacus convention a year ago.

One of these was the need to be realistic on the lack of loyalty of any deposit-taking institution's largest and longest-standing deposit customers.

"Mutual ADIs cannot take their strong deposit franchise for granted because your competitors are also very alert to the benefits of a stable and diversified retail deposit base.  Competition for retail deposits is now more fierce than it has been for many years," Laker said.  

"This has obvious implications for the profitability of mutual ADIs [which] have no option but to compete on price and service. Depositors now are very rate-conscious."

Laker noted that APRA required credit unions and building societies - in the face of resistance from some - to increase their minimum liquidity holdings late last year as the financial crisis escalated. He said liquidity peaked at around 19 per cent at the height of the crisis, a level he described as "well above our expectations".

He said that in the "calmer conditions of 2009" APRA redirected its supervisory priorities in this risk area to ADI funding plans.

Laker politely noted that "the plans we have reviewed this year have improved in quality and have been more detailed than previously" but there was a sting in the tail.

He told the CUBS managers and directors to reflect on "the behaviour of traditional retail deposits compared to potentially more volatile deposit sources such as quasi-wholesale deposits or internet-style deposits" as well as "the termination, in due course, of the government guarantee of large deposits.
 
"Mutuals that have increased their reliance on large wholesale deposits will need to manage rollovers carefully.  

"We have been a little surprised that some mutuals are arguing that large deposits from organisations such as local councils and RSL Clubs should be considered to be routine retail deposits."

Councils and clubs and also superannuation funds are often the cornerstone of the deposit base of a well-connected, regionally-based ADI.

If anything, the managers of those deposits may not have been as flighty as they could have been over the last year.

There is not much evidence, for example, of money managers systematically carving up deposits into $1 million chunks and spraying them around the banking system in order to ensure that all deposits are guaranteed without having to pay the fee on deposits of more than $1 million.

Yet as the Australian government guarantee on deposits rolls off in 2011 (and assuming there is no extension, or phase out) ADIs may find a lot of deposit funds are much less stable than they considered in the past.