Can Australian Credit Unions and Building Societies Compete with Commercial Banks? Expanding the Regulator’s Toolkit

The Australian Federal Government has recently proposed to re-regulate the finance sector. One of the key concerns is the inability of the credit unions and building societies (CUBS) to compete with banks. Therefore, the paper's main motivation is to evaluate to what extent CUBS can compete with banks by employing variables commonly used to assess the financial performance of commercial banks in an advanced benchmarking tool. Unfortunately, discovering best or worst practices is often handicapped under simple gap analysis or traditional financial ratio analysis because of their narrow focus which ignore interactions among multiple variables or trade-offs. The key statistical technique utilised in this study – Data Envelopment Analysis (DEA) – is a multi-criteria decision making tool best known for its ability to capture the various interactions among multiple inputs and outputs in a single value. We emphasise the potential use of DEA-based financial efficiency analysis as an off-site monitoring instrument that may be of particular interest to regulators and complement existing bank examination procedures. Because uncertainties in a problem bank may create unquantifiable financial burden for those providing public guarantees, identifying problem institutions is also deserving of particular attention. Our key findings are that CUBS may struggle to compete effectively with existing banks and that potentially problematic institutions may be more prevalent in the CUBS segment