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Therese McCarthy Hockey, executive board member of the Australian Prudential Regulation Authority (APRA), today (14 March) released a statement discussing the risk to the modern mutual bank.
She said mutuals who “fail to evolve could find themselves struggling to stay relevant”.
Mutuals have seen significant growth in recent times. A decade ago, they made up 3 per cent of home lending market share. Now, they make up 5 per cent, growing around half a percentage point in the last year alone.
However, according to McCarthy Hockey, “what got you here, won’t get you there”, and mutuals need to be aware of the evolving market in which they operate.
Advances in technology and shifting consumer sentiment is increasing risks involved in banking, she said.
What is described as “strategic risk”, the statement delved into the importance of mitigating this risk by “protecting today” and being “prepared for tomorrow”.
This increasing importance of investing in tech is somewhat of a double-edged sword. It keeps consumers engaged with modern processes but comes at the risk of falling victim to cyber criminals.
McCarthy Hockey emphasised the importance of maintaining strong cyber security systems to tackle these issues which are becoming more and more prevalent by the day.
Maintaining the proper funds to get through times of crisis was also outlined. With the current volatility of the global economy, APRA wants to ensure customers of mutuals won’t be left out to dry if something were to impact the sector.
Preparing for a “rainy day” was driven home as one misstep or outside influence could leave customers treading water.
The “war for talent” was also recognised as a major concern, as hiring and retaining skilled workers remain a key challenge for the industry.
APRA said dealing with these issues comes from the top and is working to ensure governance is upheld through capable leadership.
“For the mutuals, our observation is that some boards lack the necessary skills to guide their banks in a modern banking environment, in particular technology skills. That may require you to upskill existing directors, but you might also need to look beyond your bank’s traditional geographic or industry-based pool to seek fresh talent,” McCarthy Hockey said.
Brokers were also mentioned in the statement, with APRA worried about the reliance on the channel for originating loans.
“The data shows that mutuals have gone from a quarter of new housing loans originating from brokers to almost half. (Mutual boards should be aware relying on brokers for loan origination does carry risks as these customers are more likely to leave if they can find a cheaper deal somewhere else),” McCarthy Hockey said.
The power of a merger was discussed and put forward as an effective means of promoting growth and scale.
“APRA believes there is scope for mutual banks to explore the possibilities of pooling resources or expertise. We would encourage the sector to look at these types of innovative ideas provided they can manage the risks and potential conflicts.”
The statement urged mutuals to consider how risk is dealt with and whether or not the organisation has the capacity to make it through an incident. “Recovery and exit planning” were highlighted as important for any mutual.
Planning for the future is key and those who do not could risk fading away. Being “prepared for tomorrow” is important and APRA is committed to supporting mutual banks through regulatory reviews and initiatives aimed at enhancing competition and consumer choice while maintaining financial stability.
Mutual banks must proactively address strategic risks, invest in technology and talent, and develop robust recovery plans to ensure their long-term sustainability in a dynamic and competitive environment. Boards must take decisive action to prepare for future challenges.
“Whatever your preferred strategy for long-term sustainability, it cannot be complacency. The customer-owned banking model may have prospered in Australia for more than a century and a half, but not every mutual has lasted the distance,” McCarthy Hockey said.
“So no matter how confident you are that your bank and its customers are protected today, make sure you also reflect deeply on whether you are prepared for tomorrow.”
