In this ACFS Financial Policy Brief, Professor Kevin Davis considers whether mutual banks and ADIs can take advantage of the reputational damage to larger banks to attract customers, grow their market share, and increase competition in the market for retail financial customers. He concludes that regulatory minimum capital requirements which are not suited for, but applied to, mutuals will prevent such an outcome. This is despite recent approval to issue Mutual Equity Interests as a form of regulatory capital because the cost to members of such issues will likely exceed the benefits.
He argues that radical changes are needed to get around the capital requirement roadblock. He recommends that mutuals should consider, and legislators and regulators facilitate, the creation of new investment products for financing customer loans similar to P2P/marketplace lending. Investors in “loan fund units” offered by the mutual would have a direct interest in a portfolio of loans, giving a higher expected return than deposits, but would face a risk of loss of part of their investments if borrower performance was poor. This type of intermediation should not attract (significant) capital requirements and is consistent with the original communal self-help ethos of mutuals whereby members with surplus funds made them available to those currently seeking funds.
This FPB was prepared by Professor Kevin Davis, Research Director at the Australian Centre for Financial Studies.
The ACFS Financial Policy Brief series provides independent analysis and commentary on current issues in financial regulation, with the objective of promoting constructive dialogue among academics, industry practitioners, policymakers and regulators and contributing to excellence in Australian financial system regulation.
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