Mutuals in unsettled times

John Laker, Chairman - 2011 Abacus at Australian Mutuals Convention, Cairns

Just when we thought it was safe to go back in the water!



This is the third time since the global financial crisis erupted that I have had the pleasure of addressing the Abacus—Australian Mutuals Convention.

This is the third time since the global financial crisis erupted that I have had the pleasure of addressing the Abacus—Australian Mutuals Convention. And, alas, the opening routine may be becoming a little stale! The Convention starts with a flourish on a forward-looking and uplifting theme — this year it is ‘Optimism and Opportunity’ — and immediately the prudential regulator enters the scene as the teller of cautionary tales. So it is again this year!

If the Conference had been held earlier in 2011, this opening routine might have played differently. Then, there was blue sky above and ahead for the Australian banking system. The global economy was recovering and Asia was growing strongly. Global funding markets were fully open for business. Despite the spectre of a Greek default, investor sentiment was firming, underpinning a solid improvement in global equity markets. The Australian economy was continuing to benefit from record terms of trade, boosting income and employment, but not all sectors of the economy were travelling at the same speed. All in all, it was a supportive environment for our financial institutions. But not one for easy yards! Households and businesses (outside the resources sector) were in cautious mood, willing to entrust their banking institution with a larger share of their savings but reluctant to avail themselves of its lending products.

More recently, as we all know, the storm clouds have been rolling back in. The European sovereign debt and banking problems and the sense of policy paralysis in the United States have roiled global financial markets. Global equity markets have again become very volatile, with some very wide daily swings in bank share prices particularly. The appetite of investors for bank risk has been waning and the global growth outlook is uncertain. The global financial crisis is clearly not a spent force! The implications of these developments for Australia are still unfolding but, obviously, we are again in unsettled times.

This is a more sobering backdrop for your Conference than it might have been. Not a reason, however, to challenge its theme. For all the attention on Europe and the United States, the International Monetary Fund is still forecasting that growth in the global economy will be at trend levels this year and the next, and most of Asia is performing well. The medium-term outlook for the Australian economy is one of solid growth, even if nearer-term prospects may have been dampened by recent global market turbulence. There are good reasons for optimism. And good opportunities for well-run and clearly focussed mutuals to prosper. I would dare to suggest that a third ‘O’ could be added to the Conference theme — that of ‘objectivity’. In its pure sense, objectivity means making rational decisions in the absence of emotion or bias. For mutuals, it can be taken to mean remaining alert to the realities of a challenging environment and exercising sound, hard-nosed business judgment. Mutuals have demonstrated these qualities in the earlier tumultuous period of the crisis and, I am confident, will continue to do so during these crisis aftershocks.

The current challenging environment

I mentioned that it has not been easy yards for financial institutions, mutuals included. No doubt, when the worst of the crisis seemed behind us two years ago, some banking institutions salivated at the prospect of returning to the headier days of strong balance sheet growth that supported a sustained period of profit increases before the crisis. A return to what many may have come to think of as ‘normal’. Two years ago, at this Conference, I was even cautioning about the dangers of complacency and adrenalin rushes. The reality has been different. If, as the saying goes, a rising tide floats all boats, this tide has been coming in only slowly.

What are the factors contributing to make the current environment a challenging one for mutual authorised deposit-taking institutions (ADIs)? I will save some comments about friendly societies, also grouped under the Abacus banner, until later.

I would draw out three main points.

Firstly, the Australian consumer has become very cautious.

Measures of consumer confidence have fallen substantially from recent peaks, a trend that current global market turbulence will not help. Yet this is an economy that is experiencing rising per capita incomes, enviably low unemployment rates compared to most advanced economies, and a once-in-a-century boost to our terms of trade. As the Governor of the Reserve Bank of Australia noted recently, ‘...this is, at least potentially, the biggest gift the global economy has handed Australia since the gold rush of the 1850s’.

What lies behind this caution? The spate of natural disasters last summer, expectations of higher interest rates, the vicissitudes of politics, concerns about whether China’s powerful growth engine might falter — all of these will have weighed on confidence at one time or another. Some of these influences are ephemeral in nature and can be expected to pass in time. However, it would appear that there are longer-term influences at work.

This brings me to my second point. The Australian consumer currently prefers to save than to borrow.

A period that has come to be known as the ‘Golden Decade’ or the ‘Great Moderation’ has ended. This was the period, prior to the crisis, when inflation and interest rates were at generational lows, confidence was high, and households were keen to increase their borrowings (leverage) to build their wealth through housing purchases. It seemed a one-way bet to prosperity, in Australia and many other countries, until the crisis dramatically changed the odds. Since the crisis, the Australian consumer has reined-in their enthusiasm for debt and has rediscovered the virtues of saving. The household savings ratio has almost doubled, returning to levels last seen in the mid-1980s. This is a very positive development for the funding of banking institutions, a point I will comment on later. The converse, however, is that housing credit, the ‘bread and butter’ activity of mutual ADIs, is currently growing at an annual rate as low as six per cent. This is well below the double-digit rates recorded during the Golden Decade and, indeed, is the lowest growth rate since this series was published.

No doubt demographics are also playing a part here. The ‘baby boomer’ generation is moving into retirement and will be seeking to reduce leverage and rebuild wealth lost through the share market declines and other falls in wealth during the crisis.

My third point is that competition in the housing lending market is likely to remain strong.

There is the obvious corollary of a slower growing pie. APRA supports active competition in this market, provided such competition is sustainable and based on sound credit standards. To date, competition has been mainly around pricing and service, through discounted mortgage rates, special introductory offers and prompt approvals. Such competition is generally transparent and easy for Boards and senior management to monitor and manage. APRA’s risk radar begins to flash, as you well know, when competition begins to take the form of lower credit standards, which experience tells us comes in the later stages of the competitive cycle.

Since the onset of the crisis, there have been significant changes in market shares in housing lending. Major banks have gained share, at the expense particularly of lenders that had previously relied on securitisation for funding. Mutual ADIs have succeeded in holding their market share but they have felt the heat of competition. The weakness of business demand for credit over recent years has meant that the larger competitors to mutuals have turned much more of their attention to housing lending as their main source of volume growth.

This competition on the asset side of mutual ADI balance sheets has been matched, as I will discuss shortly, by competition of equal intensity on the liability side, that is, for deposits. Despite this competition, mutual ADIs have been able to maintain their net interest margins, arresting what had been a long, steady decline in margins. Taken together with growth, albeit slower growth, in lending volumes, mutual ADIs have continued to generate solid profits. In 2010/11, just over two-thirds of credit unions and building societies recorded profit levels that were higher than the previous year and, for almost the same ratio of institutions, profits have now recovered to pre-crisis levels. Return on assets, which had taken some buffeting during the crisis, has also improved strongly. This ‘quiet achievement’ on the part of mutual ADIs has been an important source of their strength and it is one reason why APRA has been able to say, with confidence, that the Australian banking system is well placed to deal with adversity.

Some supervisory issues

These unsettled times do not call for any change in APRA’s supervisory approach to mutual ADIs. Unless your mutual strays from the path, you are unlikely to notice any discernible difference in the tempo or the coverage of our dealings with you since the crisis began. In other words, more of the same tough love! Clearly, though, those broad economic developments I have just sketched are shaping APRA’s thinking.

Let me offer some comments on three main supervisory issues: credit standards, liquidity and funding, and governance.

A fundamental lesson from the global financial crisis, still being played out today in the US housing market, is the importance of prudent and robust credit standards. The Financial Stability Board, which supports the G-20 Leaders in addressing vulnerabilities in the global financial system, has been running the ruler over housing underwriting and origination standards around the globe, and its report of March 2011 is well worth a read. The report emphasises the fundamentals — the need for effective verification of income and financial information, for reasonable debt servicing coverage, appropriate loan-to-valuation ratios and sound real estate appraisal/valuation management.

Nothing new for mutual ADIs here. However, the report does reinforce my message to previous Conferences about ‘getting the basics’ right in banking, starting with sensible lending practices. That message has generally been well understood, and the asset quality of mutual ADIs has remained another source of strength. At the end of June 2011, the non-performing loan ratios on housing lending portfolios were only around 0.3 per cent and 0.5 per cent, respectively, for credit unions and building societies. This is a reassuring picture, certainly by international standards, but an upward trend is now clearly discernible and needs to be monitored and managed carefully.

Many of you may be aware that I recently wrote to the Boards of a number of larger ADIs reminding them of the need to be alert to any deterioration in credit standards in housing lending. The background to that letter was the continued upward drift in non-performing housing loan ratios and signs of emerging pressures on credit standards. Such pressures can take the form of a relaxation of loan-to-valuation or debt serviceability requirements or the introduction of new products with higher risk features. In contrast to competition in pricing or service, the consequences of any lowering of credit standards for the health of the lending institution are more opaque and can take time to fully emerge and understand.

My letter was deliberately targeted at the largest lenders, which are the industry’s standard-setters. However, the assurances we sought are the assurances we would expect to receive from the Boards of mutual ADIs in our normal supervisory reviews. Let me pose the questions. Are you clearly monitoring your institution’s housing lending portfolio, with a clear focus on the quality of new lending? Are you comfortable with current credit standards? Are you tracking and closely scrutinising the level and type of lending policy exceptions? Are your provisioning practices consistent with current credit standards? Are your remuneration arrangements in this subdued market environment rewarding growth or market share targets that are being achieved by substantially higher risk-taking? No doubt you will all answer yes to the first four questions and no to the fifth, but APRA nonetheless sees instances — fortunately, isolated instances — where credit standards have been compromised for the sake of growth.

Next, let me turn to liquidity and funding, yet another source of strength for mutual ADIs. Mutual ADIs have long had the advantage of a secure and stable funding base through retail deposits. Over recent years, they have also been the beneficiaries, like other banking institutions, of the strong increase in the rate of household savings, a good part of which has flowed into deposits with ADIs.

The unique bond between a mutual ADI and its customers, who are also its owners, underpins your customer loyalty and that loyalty has proven a significant factor in the resilience of the funding positions of mutual ADIs through the crisis. However, your depositors are not rusted on and competition for retail deposits has, at times, been quite fierce. Despite this competition, mutual ADIs have been able to hold their share of the retail deposit market but there can be no resting on laurels. Your larger competitors, looking ahead to the Basel III liquidity reforms, have also been keen to develop, and protect, a stable and diversified retail deposit base. Cognisant of the need to ensure that their funding position remains robust, mutual ADIs are taking a more proactive approach to understanding depositor behaviour, ensuring adequate diversification between retail, wholesale and securitisation funding sources, and matching maturity profiles to loan growth forecasts. APRA welcomes these improvements; as we know, a weak funding base can see the liquidity position of an ADI compromised quickly, and potentially fatally, in the event of stress.

On 1 February 2012, the Financial Claims Scheme will have a new, permanent cap of $250,000 per person per institution. As the Government has noted, this cap will protect the savings held in around 99 per cent of Australian deposit accounts in full — a generous scheme by international standards. For that reason, the transition from the current higher limit on the Scheme should not pose difficulties for mutual ADIs. Over recent years, some mutual ADIs seeking to diversify their funding base have increased their reliance on large wholesale deposits from organisations such as local councils and RSL clubs. To the extent that these or other deposits will not be covered by the new cap, APRA would expect the mutual ADIs concerned to be working closely with their depositors to manage any rollover risks.

Before I leave this topic, I would like to offer two brief comments on funding instruments. Firstly, APRA has been discussing with a group of credit unions and building societies the possibility of raising funds through an aggregation model. APRA has no in-principle objections to innovation in this form; such structures may provide access to wholesale funding that is currently denied to smaller institutions standing alone. However, it is imperative that participants fully understand the risks involved in these structures, particularly rollover risk. This risk could easily arise in times of stress, leaving participants with funding holes that would need to be quickly filled.

Secondly, a comment on self-securitisation. This is an arrangement under which an ADI ‘packages’ mortgage loans on its books into an instrument that can be used in repurchase transactions with the Reserve Bank of Australia. Self-securitised instruments are not intended for day-to-day funding purposes but they have proven their worth at times of acute market pressures earlier in the crisis. I mentioned at the 2009 Conference that APRA expected all large credit unions and building societies to establish self-securitisation facilities with the Reserve Bank of Australia as part of their contingency planning. Many have now done so but, to be frank, we have also had some pushback. Some have argued that existing securitisation warehouse arrangements and/or other committed facilities are an acceptable alternative. We disagree. Experience in 2008 was that such arrangements can be unreliable at the very time they are needed. Prudence dictates another instrument in the crisis management armoury.

My opening address would not, of course, be complete without a word on governance. My letter on credit standards in housing lending, and the questions I have just posed to the Boards of mutual ADIs, may trigger comment that APRA is coming to ask too much of Boards or may not understand the distinction between Board and management responsibilities. Similar comments have been made during the long dialogue we have had with our regulated industries on governance issues, and we listen carefully.

That said, APRA’s prudential regime is built on the fundamental premise that the Board has ultimate responsibility for the sound and prudent management of the institution. Given the egregious examples of poor governance in banking systems offshore during the crisis, Australia has been well served by our approach. We rely on Boards to be vigilant and engaged, and our expectations are set out in a range of formal requirements. Rather than constraining them, we see our requirements as empowering Boards with information to make informed decisions. APRA has also had one or two sharp reminders in the past of the dangers in not communicating directly with the Board. All in all, APRA will not resile from our expectation that Boards play a pivotal and active role in risk management.

To take a simple example on credit standards. A prudent and comprehensive lending policy approved by the Board may still allow for exceptions where a borrower, all circumstances considered, presents as a sound credit risk even if not all the boxes are ticked. The Board would not normally involve itself in individual exceptions — these are matters for management discretion — but a good Board would establish clear lines of accountability for exceptions and would expect a regular and clear report on the frequency and type of exceptions. That said, APRA does find examples where lending policy exceptions are substantial in number. A lending policy that is honoured in the breach is no lending policy at all, and we would expect the Board to stamp on this.

One aspect of governance we would like to explore with our regulated institutions, which is relevant to industry comment, is the support that Boards receive from management. My fellow APRA Member Ian Laughlin has spoken about the need for management to recognise the difficult role of the Board and to make it as easy as possible for the Board to meet its various responsibilities. He drew the distinction between operational support from management, by way of advice and regular management reporting, and more strategic support that helps the Board to think ahead, understand and focus on key issues, and address its responsibilities in a systematic way. Where we can, APRA may be able to help in promoting better engagement between the Board and management by providing more guidance on what we expect and do not expect from the Board. Certainly, our increasing focus on risk appetite statements is intended to ensure that the Board has a clear line of sight on risk management priorities and is not overwhelmed with details.

Some regulatory issues

Let me turn now to the regulatory landscape and discuss some issues of particular relevance to mutual ADIs. Friendly societies get a free pass at this point, but only because APRA’s proposals to upgrade and harmonise capital standards for the general and life insurance industries (including friendly societies) are a large subject for another time and place.

Dominating the regulatory landscape, of course, is the new global capital and liquidity regime of the Basel Committee on Banking Supervision, which is aimed at promoting a more resilient global banking system. This regime, a response to the ambitious reform agenda of the G-20 Leaders, has been some time in development — I outlined it at the 2009 Conference — but has now moved into the implementation phase.

The Basel III package has arrived at your doorstep. Open it with confidence, there is nothing inside ticking away for mutual ADIs!

The Basel III capital regime seeks to raise the quality, quantity and international consistency of bank capital. The regime is intended to apply to internationally active banks but, as with the Basel II Framework, it will apply in Australia to all ADIs, as the foundation for a more robust banking system. APRA proposes to introduce the Basel III capital regime as set out in the ‘rules text’, except only for certain aspects of the calculation of regulatory capital where we believe our current approach remains appropriate. Our proposals are in the public domain.

The first implementation milestone is 1 January 2013, when APRA proposes to introduce the new global minimum requirement for Common Equity Tier 1 (after deductions) of 4.5 per cent of risk-weighted assets, the minimum requirement for Tier 1 capital of six per cent and the Total Capital ratio of eight per cent.

No sweat for mutual ADIs — you are already there!

The second milestone is 1 January 2016, when APRA proposes to introduce the new capital conservation buffer of 2.5 per cent, taking the minimum requirement for Common Equity Tier 1, including the new buffer, to seven per cent. Commensurate increases will apply to the other mimima.

Again, no sweat for mutual ADIs — you are already there!

Your one challenging area in Basel III, where we would like your thinking caps on, is the design of capital instruments that might be issued by mutual ADIs. Basel III requires that, to be eligible as regulatory capital, all classes of capital instruments must be capable of absorbing losses at the point of non-viability. At that point, without going into the details, capital instruments must either be converted into equity or written-off. Only the latter appears an option for mutual ADIs. We are aware that the mutual banking sector in Europe is looking closely at this issue and we would encourage you to keep a good eye on what might emerge there. We are, of course, open to submissions on the issue.

On a related point, APRA has been in discussions with the Australian Mutual Group on its proposal to redeem an existing five-year Lower Tier 2 debt instrument and reissue via a pooled trust structure. This proposal has hit a Basel III roadblock. Many of our difficulties with it stemmed from its credit enhancement characteristics, loss reserves and the like, that are not permitted under Basel III unless provided by independent third-party investors. We understand that the proposed instrument has gone through further iterations and we will no doubt hear from the promoters again.

The Basel III liquidity regime seeks to promote stronger liquidity buffers to ensure that banking systems are more resilient to liquidity stresses. The regime introduces two new global liquidity standards — a 30-day Liquidity Coverage Ratio to address an acute liquidity stress scenario and a Net Stable Funding Ratio to promote longer-term resilience.

Underpinning this regime are the Basel Committee’s Principles for Sound Liquidity Risk Management and Supervision (2008), which set out qualitative requirements and detailed guidance on the management of liquidity risk.

The details of the Liquidity Coverage Ratio and the complication it initially posed for Australia need not concern this audience. The status quo will continue for credit unions and building societies. The minimum liquid holdings (MLH) approach under which they operate is working effectively to deliver an appropriate degree of resilience for ADIs with simple, retail-based business models. We will leave this approach in place, but there will be some tinkering with details. We have said nothing to date about the application of the Net Stable Funding Ratio but expect no surprises when our Basel III liquidity proposals are released shortly.

As we have said before, we will continue to take a risk-based approach in determining whether any credit union or building society with a more complex business model should remain exempt from the new global liquidity regime.

All ADIs will be subject to the qualitative requirements of the Basel Committee’s Sound Principles, which APRA intends to incorporate into its revised prudential standard on liquidity. Central to these requirements is that ADI Boards will need to articulate their tolerance for liquidity risk, approve the institution’s liquidity risk management framework and approve its funding strategy. No surprises here, either. We had foreshadowed this step in our September 2009 discussion paper on ADI liquidity risk and ADIs should be well-advanced in meeting these qualitative requirements.

Before leaving Basel behind, a word about securitisation. Residential mortgage-backed securities (RMBS) were an important source of funding and capital management for a number of ADIs before the global financial crisis but investor demand, particularly from offshore, subsequently evaporated. Although offshore investors are still absent, conditions in the RMBS market in Australia have been improving: issuance in the first half of 2011 was the strongest since 2007, spreads in the secondary market have been tightening and the Australian Office of Financial Management has been able to wind back its support. These developments augur well for a recovery in the traditional ‘originate-to-distribute’ securitisation model that had served ADIs well before, in global markets, it became distorted through complex and opaque structuring.

Market developments are, nonetheless, making it very difficult for ADIs to secure capital relief on RMBS issues. There is a strong push by global policymakers for issuers to retain ‘skin in the game’ and domestically, in the absence of market demand for these tranches, it is becoming common practice for ADIs to hold the subordinated or ‘first loss’ tranches of their RMBS issues. These tranches are a concentrated credit risk investment and no issuer retaining them could argue it has achieved significant credit risk transfer. In these cases, RMBS issues can be a funding vehicle only. APRA has no in-principle difficulty with funding securitisations as such — they will be complying securitisations under our prudential standard if they meet all of APRA’s requirements except for significant credit risk transfer. We will be writing to ADIs shortly on this subject.

New prudential requirements for securitisation, part of what is known as Basel II.5, come into effect on 1 January 2012. I would encourage all mutual ADIs with existing programs to conduct a robust analysis to satisfy themselves that these programs comply with the new requirements. In our recent experience, some self-assessments have left much to be desired, but I can assure you that APRA will not be returning to the previous arrangement where it pre-approved securitisation schemes.

On to a regulatory issue that has evoked a range of views and passions among mutual ADIs — the use of the term ‘bank’. We all know that, with one exception, there is now little that distinguishes banks, credit unions and building societies in Australia’s regulatory and supervisory framework, or in the types of financial activities that they can undertake. The one exception is Section 66 of the Banking Act 1959, which restricts the use of the terms ‘bank’, ‘banker’ and ‘banking’. Under APRA’s guidelines, the restricted terms ‘bank’ and ‘banker’ can only be used in the business names of ADIs that have APRA’s approval to do so and hold at least $50 million in Tier I capital. This latter ‘substance test’ has been in place since 1992.

Earlier this year, in the context of its Competitive and Sustainable Banking System package, the Government asked APRA to review the use of the term ‘bank’. Most of the submissions received argued — with different conclusions — that APRA should look at this issue only through the prism of competition between banks and non-bank ADIs. However, APRA needs to use a wider prism that takes financial stability considerations into account. After all, the substance test applies not just to existing credit unions and building societies, but equally to potential Australian-owned entrants and foreign bank subsidiaries. Seen through that wider prism, any lowering of entry standards for new bank entrants, by weakening the substance test, would run counter to the general thrust of global reform initiatives to strengthen capital in banking systems.

The current guidelines provide scope for a number of credit unions and building societies to become a bank if they so wish. The call is theirs. We have recently granted authority to two credit unions to become a bank; they will use the term ‘mutual bank’, a term with which we are very comfortable. At least two more mutual ADIs are consulting their members on making the change and we are in discussions with others. In other words, there is movement at the station on this issue but one that does not mean leaving the mutual fold.

Finally, a word about the operation of the Financial Claims Scheme for the ADI industry. This Scheme, which APRA administers, is a strong foundation for confidence in the Australian banking system because it will provide depositors with timely access to their deposit funds up to the defined cap — $250,000 from 1 February 2102. APRA hopes that the Scheme will never need to be used but we must plan for the possibility that it will be. If the Scheme is to work as intended, it is an essential requirement that ADIs be able to identify their customers with a high degree of accuracy and generate aggregate deposit data at short notice on a ‘single customer view’ basis.

We are well aware from our discussions with the industry that this requirement may raise a number of IT challenges, particularly for ADIs with complex and multiple systems. For mutual ADIs, however, we would not think the challenges would be difficult to surmount; the priority you give to knowing your customer and the ubiquitous role of the membership number should leave you well placed to meet our proposed prudential standard and transition timetable in this area. This is important housekeeping work for the Australian banking system and I would encourage mutual ADIs to give it the attention it needs.

Friendly societies

Before I close, having left them out of the regulatory discussion, I would like to address some comments to another important and traditional segment of the mutual sector — friendly societies. Competition in this industry has created unrelenting pressure to consolidate. Since 30 June 2005, the number of APRA-regulated friendly societies has fallen by just over one-half, from 29 to 14. Of the 14, six are non-mutual friendly societies, following the decision of some societies to demutualise in an effort to adjust to changing market conditions, expand their product horizons, extend their customer base and enhance their potential for raising capital. Over the same period, I might add, the number of credit unions and building societies has fallen by a little over one-third, from 178 to 113. (As has long been forecast, credit union numbers will soon drop into double figures.)

Friendly societies generated positive investment returns in 2010/11 and the industry is in sound condition. Unlike mutual ADIs, friendly societies are directly exposed to global market turbulence because of the portfolios of debt securities and equities that they hold. For that reason, the risk from downturns in investment markets has been a key focus of APRA’s oversight of the industry since the crisis began. The current turbulence reinforces the need for friendly societies to be vigilant in maintaining strong capital levels and proactive in monitoring the potential impacts of an adverse fall in asset values on their capital position.

One aspect of capital management that APRA has been emphasising is robust stress-testing, which should include reverse stress-testing — developing scenarios that would lead to a breach of capital requirements, including situations where a combination of events unfolded. Boards should demand information and updates on scenario analysis and stress-testing so that they understand fully the vulnerabilities facing benefit funds and the management fund. This information should be used to assess the adequacy of capital management plans, including the maintenance of appropriate buffers, and to establish trigger points for further action.

In view of the current volatility in investment markets, Boards need to satisfy themselves that their investment strategy remains appropriate, monitor the quality of investments and continuously assess the liquidity positions of individual benefit funds. This is no different in principle to the vigilance we expect from their mutual ADI counterparts in unsettled times.

Concluding comments

My tour d’horizon is over!

There is nothing on the immediate horizon that should threaten mutuals that have stuck to the fundamentals. After four years in which crisis fears have waxed and waned, and have waxed again, mutuals have become battle-hardened. They know what has worked. For mutual ADIs, it is a strong focus on customer loyalty, sensible lending policies, diversified and stable funding, careful attention to costs and profitability, wise husbanding of capital resources. And, of course, strong risk management muscle! They also know what does not work — a loss of strategic focus, venturing into new areas without appropriate understanding and skill, complacency that all housing lending is bullet-proof, capital resources taken for granted, risk management muscle that has been starved or neglected.

And there is nothing in my comments that is intended to undermine the 2011 Conference theme of ‘Optimism and Opportunity’. I wish you well in developing its nuances over the coming days. But remember the third ‘O’ — objectivity. Unsettled times call for a dispassionate weighing-up of opportunities, no yearning for the Golden Decade, clear-headed planning and a steady hand on the helm until current uncertainties in the operating environment are resolved. Follow that approach and mutuals will have every reason to be optimistic in an Australian economy with such great potential.