Thank you Ken for the introduction and thank you for the opportunity to speak today.
I would like to acknowledge the Chair of the Australasian Mutuals Institute, Ken Campbell, and the Chief Executive of Abacus, Louise Petschler.
The birth of an enduring idea
It has often struck me that some of the simplest solutions to many of the world's greatest challenges have been conceived over a few drinks.
Indeed, as I flew into Melbourne last night, I'm certain that in many of the pubs and restaurants that were a bee hive of frenetic activity, many of the simplest of solutions were being proffered, over a few drinks among friends, for some of our greatest challenges. Challenges like:
- How to flood proof this mighty land of ours,
- How to permanently restore the flows in the Murray Darling River system,
- How to tackle climate change; and
- Perhaps some were even tackling the big issues such as – How to keep the stories about our favourite footy players on the back pages, rather than the front pages of our newspapers.
The problem is that most of the solutions conceived in these circumstances don't look nearly as good when analysed the next morning, with a clearer head and a slightly more sober disposition.
But every now and again, a lofty discussion among friends over a few drinks can give birth to a worthwhile idea – and occasionally, even an enduring one.
While the precise details of the birth of mutual banking may still be the subject of some historic conjecture, the UK Building societies association records that the first, or at least one of the first, building societies was formed in 1775 in Birmingham, England by a group of aspiring property owners huddled around the tables of the 'Golden Cross' tavern.
This was at a time when the industrial revolution was beginning to drive enormous economic and social change across Europe and was even before the British government began sending some of their finest citizens on all expenses paid, one way trips to the great colony of New South Wales.
As these aspiring property owners, gathered together at the Golden Cross as friends over a few drinks, they would have lamented their inability to raise the finance needed to become property owners, but out of these discussions they decided that if they could harness their collective savings power they may just be able to pool together enough funding to allow them to give some of them a chance to become property owners.
And so it was that the landlord of the Golden Cross, a Mr Richard Ketley, created a fund for those who gathered in his tavern to be able to pool their financial resources, giving birth to the idea of mutual banking, which has endured as an idea to today.
I tell this story because I think it not only speaks to the history of our building societies and credit unions, but because it amplifies their values and the fundamental strength of the mutual banking model.
The values that gave rise to the collective action of those at the Golden Cross are today reflected in the values that Abacus describes as the values of its member organisations; 'cooperation, moral integrity, trust, financial prudence and social responsibility.'
Apart from these values, the greatest strength of the mutual banking model rests in the fact that your customers are your members. At a time, when much of the dissatisfaction with the banking sector is based upon concerns that our large banking institutions are more focussed on putting the interests of shareholders ahead of other stakeholders, such as customers, the mutual banking model has no such tension or conflict to resolve.
The financial services that you provide are for the benefit of your members, who are your customers.
Members each have an equal vote on direction and governance, and the benefits they receive are by virtue of their mutual interest in the success of the association or society.
I am pleased to see you all doing more as a sector to make the community aware of this comparative advantage that you have against other competitors in the banking marketplace.
Mutual Banking in the 21st century
In a world that has changed so much since the days of Richard Ketley and the Golden Cross tavern, it is worth taking a few moments to reflect on the state of mutual banking in Australia today.
Apart from exporting some of their finest citizens to Australia, we also have the British to thank for passing on the mutual banking model, which continues to be an important part of the Australian banking landscape today.
With just over 100 credit unions and nine mutual building societies the sector holds over $77 billion in assets, and accounts for close to 8.5 per cent of the new home loan market and 11.4 per cent of household deposits.
Importantly, around half of these institutions are based outside of our capital cities, in regional and rural areas, many of them founded in workplaces or communities in similar, albeit I'm sure much more abstemious, circumstances to those of the Golden Cross tavern.
The mutual banking sector's market share provides important competition in the Australian banking sector, offering a competitively priced but differentiated product to that of the big banks – ensuring that consumers have more choice in their banking services.
Mutuals and the Global Financial Crisis
To comment on the state of the mutual banking sector in 2011 without making reference to the Global Financial Crisis, would be to avoid the proverbial elephant here in the room at the Sebel Heritage Hotel.
I wonder what Richard Ketley would have thought about all of these impressive sounding financial instruments that have become so widely used in recent times like Collateralised Debt Obligations, Foreign Currency Swaps and Residential Mortgage Backed Securities.
I suspect that names like Fannie and Freddie and perhaps even the Lehmann Brothers were more likely to have been the names of some of the regular patrons of the Golden Cross tavern than to import the connotations of systemic failure and corporate collapse that, for our generation, these names will be forever synonymous.
Whilst hard to foresee by the founding fathers of our credit unions and building societies, the events that led to and characterised the GFC had profound implications for the global banking sector, including the mutual banking sector.
The freezing up of credit markets, the drying up of securitisation, widespread bank bail outs, and the introduction of deposit guarantees by many countries across the world, and the flow on effects to the real economy were some of the impacts that flowed from the GFC that you are all aware of.
As the pendulum of global banking policy rapidly swung towards addressing questions of stability, there is no question that competition considerations became less of an immediate focus.
In Australia, policy makers acted decisively with wholesale and deposit bank guarantees, government support of RMBS and rapid fiscal and monetary policy stimulus.
With the platform of one of the strongest regulatory and prudential systems in the world combined with effective regulators, the Australian banking system withstood the force of the GFC better than any major advanced economy.
As the GFC hit, the major banks, with their strong credit ratings and access to a broader range of funding channels were well placed to cope with the impacts.
Not only did they cope, but they aggressively increased their market share in all three major lending categories.
During this period, the big banks increased their share of:
- the housing lending market by 11.7 per cent;
- the business lending market by 10.3 per cent; and
- the personal credit market by 13 per cent.
Some of this growth in market share for the big banks came at the expense of its smaller competitors and the mutual banks.
Some of this was driven by consumer perceptions around risk and safety. In this regard, we have said consistently both Government and the mutual banking sector needs to do more to inform the community.
Delivering a competitive and sustainable banking sector
I was proud to join the Deputy Prime Minister, Treasurer Wayne Swan, for the release of the Government's Competitive and Sustainable Banking System Package late last year.
There are three streams to our package.
The first is empowering consumers to get a better deal.
We want to drive competition by better informing consumers and encouraging them to take their business down the street to a get a better deal if they are not happy with the institution they are currently banking with.
We are banning exit fees on new home loans from 1 July 2011, helping to reduce the barriers to switching for people who feel they are trapped in their mortgages but want a better rate at a better institution. We believe that mortgage exit fees are inherently anti-competitive as they lock customers in and make it harder for consumers to switch.
We will introduce a mandatory key fact sheet for new home loan customers that will give people a side-by-side comparison of home loan products in simple, easy-to-understand language.
We will also be examining the feasibility of account number portability, the transfer of lenders mortgage insurance between lenders and the introduction of a central mortgage repository to make it easier for consumers to switch accounts.
The second stream is supporting smaller lenders to compete with the big banks.
This part of our package is very much about the important role that we believe credit unions, mutuals and the smaller banks will play in driving competition.
We want to see the mutual sector build a new pillar of trust in the banking system, one that would compete with the major players.
The central plank to this approach is strengthening community perceptions of confidence in credit unions and building societies.
We have seen from our experiences in the GFC that there was a lack of understanding of the way that the sector is regulated. Some customers pulled their savings out of credit unions and mutuals and put them into the major banks under the belief that the mutual banking sector was not held to the same prudential standards as the major banks.
To counter this, we want to make sure that Australians understand that mutuals are regulated to the same standards, and overseen by the same regulatory authority, as the major banks.
We have asked the Australian Prudential and Regulatory Authority to review the current guidelines surrounding approval to use the term "bank", to consider whether some mutuals could use the expression.
We also announced our intention to introduce a new official "Government Protected Deposits" symbol.
This will help consumers to identify those institutions that are already covered by the Financial Claims Scheme; which we have confirmed will become a permanent feature of the Australian regulatory landscape.
We hope that this will be an important tool in clarifying to consumers that our mutual banking sector has the same government protection of its deposits as the major banks.
Systemically, we will be helping to facilitate the efforts of the mutual banking sector to develop aggregated funding structures, accelerating development of the bullet Residential Mortgage Backed Securities (RMBS) market for smaller lenders and by supporting another $4 billion investment in AAA-rated RMBS.
To date, the Australian Office of Financial Management has invested in RMBS deals undertaken by seven credit unions and building societies, totalling $5.8 billion. This has enabled these lenders to maintain competitive interest rates, higher lending volumes and higher market shares than would otherwise be the case.
The third stream is securing the long-term safety and sustainability of our financial system.
This stream is focussed on opening up the funding opportunities available to financial institutions by allowing them to issue covered bonds, and by developing a deep and liquid corporate bond market to reduce our reliance on offshore wholesale funding by engaging our national savings.
Increasing competition
As we move forward to implement the reforms outlined in our banking package, we hope to work closely with you all to ensure that we empower consumers, boost competition by supporting alternatives and build an even stronger and more sustainable banking sector into the future.
We believe that some of the coverage of these measures has already opened up the eyes of many consumers to the existence of alternatives to the big banks, like the mutual banking sector.
In this regard it was welcome news to see that the total assets of the sector grew by around 10 per cent in 2010. It's a sign to your competitors that you have remained healthy and that we can all look forward to seeing you provide more robust competition in the years ahead.
Conclusion
As people sit around their kitchen tables trying to make the financial decisions that best meet their family's needs, we want to ensure that they are informed and have real choices available to them when it comes to their banking.
We want people to know that there are a range of alternatives and thanks to those who sat around the tables of the Golden Cross tavern more than 230 years ago and those who have followed, the mutual banking sector is a viable and competitive alternative.
I wish you all the very best with your deliberations at this weekend's conference as you work towards your mutual aspirations for greater market share and hope that you can continue to take forward the mantle of your founding fathers in the mutual banking sector by continuing to build the sector as a genuine alternative to the larger banks.
Can I conclude by saying, to the extent that I may have inadvertently encouraged you all to have a few drinks together over the weekend, I encourage you do so in a responsible way.
Thank you.