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Australian banks and credit unions

John Hermann

In the previous article, Dennis mentioned that New Zealand credit unions do not have full banking privileges. It would be interesting and useful to know how they differ from Australian credit unions in this respect.

The Australian Banking Act 1959 specifies that “only the Reserve Bank and bodies corporate that are ADIs may carry on banking business”, where ADI is an acronym for authorised deposit-taking institutions (meaning banks, credit unions and building societies). Only ADIs are legally entitled to describe their business as ‘banking’.

Australian banks and non-bank ADIs are both supervised and monitored by APRA (the Australian Prudential Regulatory Authority). And they operate their payments through deposits (exchange settlement funds) held in accounts with the Reserve Bank of Australia, even if those deposits are not held directly but via a special financial service provider. Thus ADIs are the only financial institutions in Australia that are enabled to practice fractional reserve banking.

Decades ago the credit unions in many countries did not ‘create money’. But now many do, even though their basic practices have not changed. Why? Because previously retail deposits in credit unions were not included in the calculation of the money supply, and now they are. For example, in a public statement put out by the Board of Governors of the U.S. Federal Reserve ( we are told:

M1 is defined as the sum of currency held by the public and transaction deposits at depository institutions (which are financial institutions that obtain their funds mainly through deposits from the public, such as commercial banks, savings and loan associations, savings banks, and credit unions).

Notwithstanding some misleading obfuscation in regard to the issue of the ownership of money, this statement makes it unambiguously clear that U.S. non-bank deposits have been included in M1.

In regard to the Australian scene, and as pointed out in my previous article (ERA Review, v3, n56, 2011), the RBA manager responsible for computing monetary aggregates (Chris Stewart) has explained that the shunting of non- bank deposits into M3 rather than M1 is mainly due to the inconvenience and undue cost entailed in collecting Australian M1 statistics for non-banks – given their relatively small impact – rather than for any theoretical reasons.

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