How would you explain the recent decline in the size of the building society industry?
Building societies were originally set up to pool small deposits from individuals and households in order to finance mortgage lending. Residential home ownership was highly desired by Australians and as it was difficult to obtain home finance from banks in the regulated environment, building societies were able to fill the breach and thrived. With deregulation of banks and the growth of the securitised mortgage market, the value of the intermediation function performed by building societies and credit unions (funnelling small savings into home mortgage lending or shorter term lending) was eroded by competition. Deregulation of the financial industry freed the banks’ capacity to extend home loans to individuals, which resulted in increased competition from the banking sector, making it more difficult for NBFIs to survive in their previous form. As a result many smaller societies and credit cooperatives have merged, while larger building societies converted to banks, allowing them to offer more services (although more recently building societies have been able to expand the range of services on offer) and giving them instant access to clearing house funds. This conversion from building society status to bank status resulted in an overall loss in market share for building societies.
What are the similarities and differences between the three major groups of authorised deposit-taking institutions in Australia?
The two main types of savings FIs in Australia are building societies and credit unions. Generally, both began life as cooperative organisations regulated under state or territory legislation (building societies can issue share capital but are mostly operated as cooperatives). However, with regulatory restructure in the late 1990s, both are now regulated in the same way as the banks – by APRA. Credit unions tend to provide short-term finance. Credit union members are usually linked by a common bond such as an employer or profession, which is not the case with building societies. Membership of a credit union involves the purchase of one redeemable share for a nominal sum, whereas building society membership is open to anyone who opens an account. Until 1994, the significant difference between credit unions and building societies was credit unions’ tax exemption on interest paid to non-corporate depositors. However, this tax exemption was removed in July 1994. Building societies tend to focus more on longer term lending – although the difference between the two groups in lending maturity is now far more blurred than when they were originally established.
Banks are the third type of DI in Australia, and banks tend to be far larger than building societies or credit unions, and are established under the Australian Banking Act 1959. Banks generally also have a far broader range of financial services than either building societies or credit unions, as they can leverage their size and distribution networks effectively. All Australian depository institutions are regulated by APRA and the regulation imposed is the same despite their differences.
Contrast the activities of the four major Australian banks with those of the regional banks.
The four major banks have a national focus and offer banking at corporate and retail levels, not only throughout Australia but also overseas. Many of the regional banks were building societies which converted to banks and thus tended to conduct their activities within the confines of the region or state where they had traditionally operated. More recently the regional banks have started to expand across state borders, moving away from their traditional markets. Owing to their origins, the assets of the regional banks have been predominantly in residential housing loans.
The large banks have been able to enhance their margins by offering a full range of services to retail, small and...
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