Lessons in resilience: What mutuals did right during the financial crisis
The GFC caused large financial chaos – yet Aussie mutuals stood firm. Why? Ben Woods of Australian Mutuals History dissects their resilience, built on bedrock of member focus, robust safeguards, and unwavering discipline. A lesson for all institutions: resilience blossoms from member-centricity and prudent risk management.
The Global Financial Crisis (GFC) of 2007-2009 undoubtedly left a lasting mark on the global financial landscape. Amidst the turmoil, Australian financial mutuals, including building societies and credit unions, demonstrated notable resilience, largely attributed to their inherent strengths in governance, risk management, and regulatory compliance.
Governance: A strong foundation for mutuals
At the heart of mutuals' resilience lies their member-owned structure. Unlike shareholder-driven institutions, mutuals are governed by their members, who have a vested interest in the long-term prosperity of the organisation. This alignment of interests fosters prudent risk-taking and sound decision-making, minimising the likelihood of excessive risk exposure that could jeopardise the institution's stability. As the Reserve Bank of Australia (RBA) notes, "mutuals are generally considered to have a lower risk profile than banks, reflecting their focus on long-term relationships with their members and their lower reliance on wholesale funding markets."
Mutual protection schemes: A safety net for members
Recognising the potential for financial setbacks, Australian mutuals have established mutual protection schemes to safeguard their members' deposits. These schemes, typically managed by peak bodies in each state, provide a financial backstop in the unlikely event of a credit union or building society facing insolvency. The existence of these schemes instils confidence among members, preventing panic-driven withdrawals that could destabilise the institution. As the NSW Credit Union League's Credit Union Quest noted in 1968, "currently credit unions affiliated with the NSW Credit Union League have a total cover of Loan Protection Insurance on $20,000,000 of loan balances".
Protection funds like the Savings Protection Fund in NSW were soon created by the leagues around Australia: Credit Union Stabilisation Reserve Fund (South Australia), Credit Societies General Reserve Fund (Victoria), Savings Protection Fund (Queensland), Savings Guarantee Fund (ACT), Savings Protection Fund (Tasmania) and Savings Protection Fund (Western Australia).
By the 1990s, Australian credit unions were regulated under the Australian Financial Institutions Scheme. Before financial regulation was federalised, each credit union was required to deposit a proportion of its total assets in contingency funds maintained by State Supervisory Associations (which also registered credit unions) in each state and territory.
Regulatory oversight: Ensuring financial stability
Australian mutuals operate within a robust regulatory framework, ensuring they adhere to stringent risk management practices and maintain adequate capital buffers. The Australian Prudential Regulation Authority (APRA) plays a pivotal role in overseeing mutuals' financial health, safeguarding the interests of depositors and promoting stability within the broader financial system. As the RBA notes, "the Australian financial system is one of the most stable and resilient in the world. This is due in part to the strong regulatory framework that is in place."
The GFC: A case study of mutual resilience
The GFC served as a formidable test for Australian mutuals, exposing them to the global financial contagion. However, the sector emerged from the crisis relatively unscathed, a testament to the effectiveness of their governance structures, mutual protection schemes, and adherence to regulatory standards. On February 1, 2012, a new deposit guarantee was introduced by the Australian government in the wake of the GFC. ABACUS noted at the time that “the announcement is a vote of confidence in the strength and stability of Australia’s banking institutions, including mutuals”.
GRC considerations: Lessons learned and ongoing priorities
From a risk perspective, the GFC experience reinforces the importance of:
Strong governance: Maintaining a member-centric governance framework that prioritises prudent risk-taking and sound decision-making, as exemplified by the historical role of leagues in conducting rescue mergers to protect members' funds.
Effective risk management: Continuously refining risk management practices to identify, assess, and mitigate potential risks proactively, as demonstrated by the NSW Credit Union League's introduction of the Savings Protection Fund in 1971.
Regulatory compliance: Upholding strict compliance with all applicable regulations to maintain financial stability and protect depositors' interests, as evidenced by the implementation of the Australian Financial Institutions Scheme in the 1990s.
By adhering to these principles, organisations can continue to foster confidence in their ability to weather financial storms and deliver long-term value to their stakeholders.
