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Prudential Regulations and Australian Credit Unions
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Kevin Davis
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Abstract
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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 cooperative financial institutions, such as credit unions. Such institutions are unable to raise external capital to satsify 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 form, imposes an arbitrary constraint on cooperatives' growth and can induce a focus upon inappropriate financial targets by credit union management. A further impediment to the survival of cooperative 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 forms.
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Keywords
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CREDIT UNIONS; CAPITAL REQUIREMENTS; FINANCIAL MANAGEMENT.
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Contact Details
Kevin Davis
Department of Accounting and Finance
University of Melbourne
Parkville VIC 3052
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This paper has benefited from the valuable comments of two anonymous referees and seminar participants at the Australian Institute of Bankers Conference, Melbourne, 1993, and Adelaide University.
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