Mutual Equity Interests – An Oxymoron?

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In this ACFS Financial Regulation Discussion Paper, ACFS Research Director Professor Kevin Davis examines the recent proposal by APRA to allow mutual ADIs to issue contingent capital instruments which would convert, under certain circumstances, into a new equity type claim on the mutual called a Mutual Equity Interest (MEI). Although the proposal is based on aiming for a level playing field between mutual ADIs and banks in issuing contingent capital, it makes the implicit, unsubstantiated, assumption that contingent capital is preferable to designing or facilitating issuance of some other form of equity capital by mutuals. As well as involving a number of unresolved design issues MEIs would create new, problematic, governance problems for mutual ADIs.


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This paper was prepared by Professor Kevin Davis, Research Director of the Australian Centre for Financial Studies. This paper was submitted to APRA in response to Letter to mutually owned ADIs: Mutual equity interests, regarding proposed amendments to “Draft Prudential Standard APS 111 Capital Adequacy: Measurement of Capital. The proposals are open for feedback till Friday 15 November 2013.

Disclaimer: Professor Davis is a former director of a small credit union, and also owns shares in Australian banks.

The ACFS Financial Regulation Discussion Paper 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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