Cooperative & Mutual Financial Institutions: Is there a Future? Professor Kevin Davis, Research Director, ACFS & Professor, Monash University Professor of Finance, University of Melbourne May 2016

Outline Historical role of cooperatives / mutuals in the financial sector Reasons for demise –General –Australia Forms of demise Future potential

Historical Role Diverse group of institutions internationally with varying cooperative/mutual features Credit Unions Building Societies/S&Ls Friendly Societies Cooperative Banks (particularly Europe) Life/General Insurance Companies And mutuals with profit motivated members! Stock Exchanges Payments system providers –Mastercard, Visa, CLS Bank, Swift Credit Bureaus –eg CRAA→Baycorp →Veda →Experian

Reasons for Emergence Responses to Financial Exclusion Competitive Advantages –Information advantages –Agency Issues, Objectives and Trust Reduce stakeholder conflicts Managerial risk-taking incentives –Not for Profit - Funding Advantages –Not for Profit – Communal Goals –Operating Costs - Volunteers and Sponsors –Tax advantages

A Declining Role Between 1970 and 1984 Share of household assets of Building societies increased from 8.6 to 22.5% Credit Unions increased from 1 to 5.7% Savings banks fell from 64.3 to 41.7% Credit Unions Numbers: 600 early 1980s; 285 in late 1996; <100 in 2016 Building Society Numbers: 146 in 1979; 66 (52 mutual) in 1985; 9 in 2016 (not all mutual) Most of decline in numbers due to mergers, some demutualisations some wind-up (Broadway Credit Union) some (recent) conversion to operating businesses as community bank branches of Bendigo Bank

A Declining Role Demutualisations Life/General Insurance companies –Capita (1990) AMP (1997), NML (1995), Colonial (1996), NRMA (2000) –58% of life insurance industry in 1985, now zero –ASX –Building Societies –Credit Unions – MyState, Goldfields, –Friendly Societies – IOOF, Over 50s Participants in demutualisation get windfall gain –At expense of potential future members Little evidence that demutualisation increases efficiency Many subsequently taken over by others

Reasons for Demise Privatisation (expropriation) incentives from build-up of “communal wealth” Increasing heterogeneity of members with increased scale Loss of information advantages, & common communal goal, & member involvement Increased competition and member mobility Inability to pursue objectives (including cross- subsidisation) inconsistent with profit maximisation Less incentives for efficiency/cost minimisation than for-profits? Inconsistency of professional managers’ growth objectives and lack of access to external equity capital

Reasons for Demise - Australia Deregulation and Competition Regulatory bias against mutual form (eg banking) And APRA's "Catch 22" permanent capital requirement for forming new mutual ADIs Implicit/Explicit Government Insurance of Competitors Capital Adequacy requirements Removal of Tax-free status –1995 Board skill requirements and compliance demands APRA regulation and finance sector complexity Long term decline in financial exclusion, growth in “for- profit” interest in retail customers

Cooperatives and Finance: The Future Mutuality and “not for profit” not the same as “cooperatives” –Industry Super Funds Not for profit Governance: “sort of mutual” Modern financial sector not conducive to cooperative model –Complexity, scale, regulation, competition Scope for established “mutuals” to prosper Barriers to entry high and incentives for creation of new, purely financial, cooperatives low (and efforts better focused elsewhere)