Prudential Regulation and Australian Credit Unions

Abstract

This paper examines the impact of recent changes in the prudential regulation of non-bank financial institutions in Australia, with a particular focus upon the implications for coöperative financial institutions, such as credit unions. Such institutions are unable to raise external capital to satisfy regulatory capital requirements, and are thus forced to rely upon retained surpluses to generate capital. This, it is argued, creates an incompatibility between the regulatory structure and institutional for M, imposes an arbitrary constraint on coöperatives' growth and can induce a focus upon inappropriate financial targets by credit union management. A further impediment to the survival of coöperative financial institutions can be found in the risk weights applied for capital adequacy purposes. It is suggested that these constraints will hasten the on-going decline in the number of credit unions through mergers and conversions to alternative for Ms.