FIN111 Lecture Notes - Lecture 4: Ethereum, Unsecured Debt, Main Source
Week 4 – Non-bank Financial Institutions
Non-bank Financial Institutions in Australia
• Nonbank financial institutions include:
- Building societies: specialise in making mortgage loans. They are now diversified
and hold commercial loans, corporate bonds and other investment securities in
addition to mortgage loans
- Credit unions: specialise in short-term consumer loans
- Finance companies: specialise in making loans to consumers and businesses.
• These institutions are relatively small compared to the big commercial banks that
dominate the Australian financial sector
• Whilst they hold more than $191.2 billion in assets, their growth rate of assets has
lagged behind that of the big banks
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Quick summary of financial institutions other than banks
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Permanent Building Societies
• Authorised deposit-taking institutions (ADIs) under the Banking Act 1959
• Historically concentrated on consumer mortgage loans and products funded from
deposits
• Recently pursued corporate business to facilitate growth and product diversification
• Now directly compete with banks
• Regulated by Australia Prudential Regulation Authority (APRA)
• Regulated in the same way as banks
• Focus on long‐term residential mortgages and fund them with short‐term consumer
savings deposits → exposed to interest rate risk
History of building societies in Australia
• Operated in Australia since the 1850s
• Grew rapidly leading up to the 1970s
• Peaked in 1975 → 178 societies in operation
• 1985 → reduced to 70 societies due to economic slowdowns and mergers
• 1980s and 90s → deregulation, technological development, banking sector weighed
down by nonperforming loans. Basel Accord developed which intensified
competition so building societies had to:
- merge with other societies e.g. IMB Building Society and Illawarra Credit Union
- diversify product base to a full range of products
- adopt technology to improve cost efficiency
- securitisation programs to improve balance sheet
- transforming to banks
• Today → 4 building societies remain
- B & E Ltd
- Big Sky Building Society Limited
- Maitland Mutual Building Society Limited
- Newcastle Permanent Building Society Ltd
Regulation of building societies
• Regulated by APRA
• Applies the same supervisory and regulatory framework to all ADIs
• Removes any competitive advantage that one may have over another in terms of
regulatory bias.
• BUT also places competitive pressure on the smaller institutions that do not have
the scale of operations to access capital from international markets or the
geographical reach to service large national and international companies
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Document Summary
Non-bank financial institutions in australia: nonbank financial institutions include: Building societies: specialise in making mortgage loans. They are now diversified and hold commercial loans, corporate bonds and other investment securities in addition to mortgage loans. Credit unions: specialise in short-term consumer loans. Quick summary of financial institutions other than banks. Basel accord developed which intensified competition so building societies had to: Merge with other societies e. g. imb building society and illawarra credit union. Diversify product base to a full range of products. Adopt technology to improve cost efficiency securitisation programs to improve balance sheet transforming to banks: today 4 building societies remain. Sources and uses of funds by building societies. Capital: reserves and retained profits, transferred from yearly profits and accumulated over time within the business rather than being paid out as dividends. Income and expenses of building societies: main source of income: interest income.
