Government bank plan angers shires

Reforms could mean local governments would be excluded from depositing funds in community banks.

Rural towns are seeing red after learning of State Government plans stop their shire councils supporting their community bank.

The proposal that has the towns upset is one they fear will hurt not only community banking models such as Bendigo Bank, but the wider community.

In December, Local Government Minister John Castrilli proposed a series of reforms including one aimed at protecting local government from bad investments after 10 WA local governments suffered multi-million losses with Lehman Brothers.

The reform measures, restricting local government investments to low-risk products, effectively stops them banking with second-tier institutions like Bendigo Bank, as well as building societies and credit unions.

But rural local governments and their communities are concerned that such a move is another nail in the coffin for their community and what, in many towns, may be the only bank.

A decade ago, these towns experienced the mass exodus of major banks and have worked hard to establish community banks, in many cases investing their own funds to do so.

In the past 11 years, Bendigo Bank has contributed $5.5 million in grants, donations and sponsorships to communities in WA.

Last year, in Kulin alone, Bendigo Bank — WA’s first branch — contributed $100,000 towards the construction of three retirement units.

Kulin shire chief executive Greg Hadlow said the profit the community bank made on the shire’s deposits could be up to $25,000 per annum.

“To introduce regulation that restricts the ability to invest with our local bank will put an added burden onto our local government to provide assistance to local clubs and organisations, ” Mr Hadlow said.

He said the proposal, which would limit local government investment to AAA- rated banks, was flawed.

“It’s ridiculous for one simple reason: Lehman Brothers, which went under, was AAA-rated, ” he said.

“Unless directed otherwise by council, I will continue to invest the Shire of Kulin’s surplus funds with Bendigo Bank.”

If Mr Castrilli’s proposal is passed, local governments will have to withdraw funds from Bendigo Bank.

Cranbrook shire president Doug Forrest said pulling the shire’s deposits out of the local community bank would hit the community hard.

“The local bank puts a lot of money back into the shire, ” he said.

“Our local manager understands the needs and issues of what is happening in our community and the shire money in term deposits, gives the capacity to generate lending within the town.

“I understand where the minister is coming from, but a term deposit with the local Bendigo Bank doesn’t give you exposure to toxic loan products that exist in the United States.”

Bendigo Bank State manager David Boromeo said there were generally 35 to 40 shires investing with the bank at any one time.

“We provide a mechanism for local communities to retain capital in their community and the exclusion of the biggest, or one of the biggest businesses in town — the shire — would have a long-term impact on the benefit the community bank can deliver for the individual community, ” he said.

“The changes proposed go against the principles the Federal Government is trying to introduce on increasing competition. This has the potential to limit competition by excluding some banks, credit unions and building societies.”

WA Local Government Association president Troy Pickard said he would discuss with Mr Castrilli the possibility of including alternative authorised deposit-taking institutions such as community banks.

In a written response, Mr Castrilli said the banks defined as ‘low-risk investments’ were yet to be determined.

“If the WA Government decides to proceed with this proposal, the detail of regulations will be developed in consultation with local governments, the WA Treasury Corporation and the WA Department of Treasury and Finance, ” he said.

An amendment Bill is expected to be introduced by mid-year.