Do credit unions and building societies create credit money?

John Hermann

This short article summarises my recent thoughts on this issue. The essential difference between banks and credit unions/building societies (CUBS) is that the former are commercial firms listed on the stock exchange whose profits derived from retail members provide dividends to shareholders, while the latter are cooperatives with a mutual agenda (meaning that in theory the profits and losses are shared by retail members in proportion to the business each transacts).

Around 10 years ago, at an ERA meeting in Adelaide, we enjoyed a presentation from guest speakers representing a well-known credit union. At that meeting it came as a revelation to me to discover that credit unions are obliged to maintain deposits in the Reserve Bank of Australia (RBA) equal to a substantial fraction of their deposits. The speakers complained to the meeting that this placed credit unions at a competitive disadvantage to Australian commercial banks who (since the start of the 1990s) have been subjected to no such statutory requirement . I also discovered that the changes to banking practices which occurred during the 1990s resulted in credit unions and

building societies being placed on an equal footing with banks in regard to prudential supervision. All of whom are now obliged to report to APRA (the Australian Prudential Regulatory Authority) on a regular basis.

These facts prompted me to have a look at the Australian Banking Act and its amendments. In that Act, it is clearly stated that commercial banks, credit unions and building societies will be treated separately from all other financial institutions. They are collectively designated as Authorised Deposit-taking Institutions (ADIs). Moreover every ADI has the right to describe itself as a “banking institution” and to describe its business as “banking”. This is very interesting, since the primary business of banking is to take deposits and advance loans. And lending by banks to their retail customers always involves the creation of new bank credit money.

The acid test would seem to be whether a financial institution is to be regarded as a true depository, meaning that its “deposits” are counted as forming part of the national money supply (the latter being money accessible to and used by the public and business community). Partly with this in mind, I recently directed a letter to the RBA, asking why – in their monetary aggregates – the deposits of ADIs are included in the aggregate M3 (the broader measure of the money supply which includes time deposits) but not within the aggregate M1 (transaction money). Specifically my letter contained the following: “I can see no logical reason why M1 should exclude the current deposits of non-bank ADIs. Indeed to do so would seem to give a false statistic for the amount of transaction money available to the public and the business community.” Here is the response obtained from Chris Stewart, Senior Manager, Domestic Markets (whose team is directly responsible for constructing the monetary and credit aggregates):

… non-bank ADI deposits are not included in M1 as we can’t distinguish between current and non-current CUBS deposits. Consequently, we have a choice between over- and under-estimating M1. Liaison with the CUBS sector suggests that many of their deposits are reasonably large, with these funds not held in current accounts, consequently, the choice has been to include their deposits within M3 but not within M1. This is consistent with the International Monetary Funds statistics compilation guides, which relies on national discretion within some broad guidelines to determine the exact composition of each countries monetary statistics.

While we collect 10 different breakdowns of deposits at CUBS, we do not collect the current versus non-current breakdown for two reasons. First, we have to trade-off the burden it would impose on these firms versus our desire to get more detailed statistics. In particular, while the CUBS sector makes up about 5 per cent of deposit-taking institutions deposits, this is spread quite widely across a large number of institutions and the compilation of these statistics can be quite expensive. Indeed, the smallest CUBS have about $50 million to $60 million in assets. In contrast, the smallest Australian-owned bank is eighty times larger, having about $4 billion of assets (the Australian regional banks have assets of about $40 billion to $70 billion). Consequently,

while the banks report close to 500 items on their balance sheets each month (and about 3,000 across all the statistical forms), each credit union or building society reports about 230 items on its balance sheet.

What is clear from this response is that the omission of CUBS deposits from M1 is simply a matter of convenience, based on the undue cost of collecting the statistics, the small impact of the omission on the measure of transaction money, and uncertainty anyway about what constitutes a meaningful measure of transaction money. However the convenient shunting of CUBS deposits into M3 cannot disguise the fact that these deposits are qualitatively no different from commercial bank deposits.