New Zealand: Are the Banks helping?

by Bill Rosenberg from CTU Monthly Economic Bulletin June 2009 There has been much public debate as to whether the banks have dropped their interest rates enough in response to the Reserve Bank’s reductions in its Official Cash Rate (OCR). In May, Statistics New Zealand in its latest Producers Price Index, reported that in the March quarter “the margins that financial intermediaries [mainly banks] make on their borrowing and lending operations… increased due to the rates for borrowing falling more than the rates for lending.” This followed increases in the previous six months, and both the quarterly and annual increase were the largest since records began in 1994. Parliament’s Finance and Expenditure Committee was told by Deputy Reserve Bank Governor Grant Spencer that “It is disappointing that banks have not dropped mortgage rates further as more people face loan defaults in the coming year”. The Committee reported that “We are concerned that New Zealand businesses find it increasingly difficult to access credit from the major Australian-owned banks, where lending decisions are reportedly now being made by offshore bank parties rather than onshore relationship managers.” There were calls (as yet unheeded) for an inquiry into the banking system. In its June Monetary Policy Statement, the Reserve Bank again complained that “it appears as though the most recent reductions in the OCR have not been passed on to borrowers to the extent that we would have expected. While there has been some increase in funding costs from higher retail deposit rates and longer-term interest rates offshore, this does not appear to fully explain the relative lack of movement of interest rates at shorter terms.” The following graph from Reserve Bank data illustrates the widening bank margins. Since about March, interest rates have levelled out or risen despite continuing cuts in the OCR. In defence, the banks say they have to borrow at higher interest rates domestically because of competition for bank deposits, and rates have risen overseas where they still source almost 40% of their funds, because of the state of those financial markets. In addition, they need to tighten up their lending conditions and raise interest rates because business risks have increased due to the recession. Clearly though, the Reserve Bank is not convinced. There are at least two explanations for what is happening, both of which may apply. The first is that the big four Australian banks are taking advantage of their dominant position and pushing out their margins between their borrowing and lending costs to protect or expand their profits. Statistics New Zealand and the Reserve Bank provide some evidence for that. However it is difficult to believe that is the full story. The small New Zealand banks – Kiwibank and TSB included – have increased interest rates almost as fast. Given their competitor status, they would be more likely to have taken advantage of the increasing margins to undercut the Big Four. A second explanation is that because we have virtually unregulated movement of funds between New Zealand and the rest of the world – open international capital markets – we to a large degree import the monetary conditions of the rest of the world (interest rates and availability of finance). To simplify, if interest rates offered to savers here are lower than the rest of the world, fund managers can take their money to where interest rates are higher, forcing banks here to raise the rates they offer. If our domestic rates go higher than international rates, the banks can (and will) borrow more cheaply overseas in order to lend for mortgages and business loans. There are complicating factors such as margins for risks in our economy and changes in the exchange rate, but it means that the Reserve Bank has much weakened ability to influence monetary conditions within New Zealand. It has some influence on short term interest rates, because the OCR is for short term lending. But longer term rates are much more connected to international conditions because they can be funded profitably from overseas. We saw an opposite symptom of the same cause when the economy was at its height – the Reserve Bank had to set the OCR punitively high to have any effect. Now, no matter how low it cuts the OCR, it seems that longer term rates won’t respond sufficiently. The result undermines the needed stimulus to a depressed economy, and contributes to a persistently overvalued exchange rate, penalising exporters. A revealing scenario is being played out at the same time. The Reserve Bank wants to wean the major banks off their risky habit of borrowing at short terms (like 90 days, often overseas) and lending for mortgages longer term, and in general to lengthen the terms of their borrowing. It is likely to be worried that another freeze in world financial markets would force it to repeat what it did last year: arrange overseas funding lines to be used to prevent New Zealand’s financial system from freezing up too. The new regulations it is putting in place have been delayed, presumably under pressure from the big four Australian banks which are the main perpetrators, and Westpac came out recently saying that being forced to borrow longer term would further increase costs, which they would pass on to borrowers in higher interest rates. We said these regulations are important, and the banks have a responsibility to keep interest rates down by absorbing some of the costs – if they exist – into their profit margins. It is interesting that, according to an article in the Reserve Bank of Australia’s June Bulletin, the same four banks when operating in Australia borrow overseas for longer terms (they borrow relatively little short term overseas). Yet a Sunday Star-Times survey of international interest rates reported on 14 June indicated that while interest rates on deposits are lower here, mortgage interest rates are already higher than Australia. The OCR is currently higher in Australia too (3.0 percent compared to 2.5 percent here). The banks have some credibility issues.

Call to 'shame and stop' bank greed

RAM - Residents Action Movement Media release 22 October 2008 Tomorrow Reserve Bank governor Alan Bollard is widely predicted to slash the official cash rate by an unprecedented 1% in order to moderate the effects of the global economic crisis. The 1.3 million Kiwi homeowners paying off a mortgage will be keen to see whether the Reserve Bank's cut is matched by a reduction of the same magnitude in their trading bank's interest rate. A fortnight ago, when the Reserve Bank of Australia cut the official interest rate by 1%, the big Australian banks reduced their interest rates by only 0.8%. "In a co-ordinated move, the Aussie banks boosted their already massive profits at the expense of Aussie home buyers," said Grant Morgan, chair of RAM - Residents Action Movement. "Their New Zealand subsidiaries will adopt the same greedy tactic here as well if they think they can get away with it. We need to shame them and stop them," said Mr Morgan. INTEREST RATE SURVEY Several days ago RAM initiated a financial survey which has so far attracted around 250 responses in Auckland, Wellington and Whangarei. One of the three survey questions asks: "Do Australian-owned banks in New Zealand charge mortgage interest rates that are too high?" "90% of respondents replied yes to this question. The survey's interim results indicate that an overwhelming majority of Kiwis think the Big Four banks are interest gouging," said Oliver Woods, co-leader of RAM candidates group and a candidate for Auckland Central. "RAM is standing in the election to give voice to the voiceless who are being shafted by corporate interests like the big banks," said Mr Woods. PROTECT OUR PEOPLE CAMPAIGN RAM is launching a "Protect Our People, Not the Speculators" campaign. Different elements of the campaign include reducing the cost of home loans, removing GST from food, making speculators pay with a Financial Transaction Tax and lifting the minimum wage to $15 an hour. "RAM's Protect Our People campaign won't end on polling day," said Grant Brookes, co-leader of RAM candidates group and a candidate for Wellington Central. "We are a people's movement. So after the election, RAM will continue to mobilise the grassroots around things like winning 3% state loans for first-home buyers of modest means, and forging a broad coalition around a referendum petition to remove GST from food," said Mr Brookes. BACKGROUNDER ON THE BANKS Here are the Big Four banks in New Zealand and their Australian owners: ANZ National Bank - owned by Australia & New Zealand Banking Group (Australia). This amalgamation of the ANZ Bank and the National Bank constitutes the biggest banking operation in New Zealand, holding over one-third of home mortgages ($55 billion).

Bank of New Zealand - owned by National Australia Bank. BNZ is the second largest bank in New Zealand as measured on total lending assets. Westpac- owned by Westpac Banking Group (Australia). ASB Bank - owned by Commonwealth Bank of Australia. The Big Four banks control 90% of the banking industry in New Zealand, putting them in a near-monopoly position. The Big Four banks have been hugely profitable. In the 2007 fiscal year, the ANZ-National Bank made an after-tax profit of $1.1 billion. "We expect to make more than a billion dollars profit again in 2008," said ANZ-National chief executive Graham Hodges. (NZPA 28.7.08.) The BNZ has announced an after-tax profit of $785 million in the 12 months to 30 September 2008. And ASB Bank cornered a $515 million net profit for the 2008 fiscal year. The Australian owners of the Big Four banks enjoyed a combined after-tax profit of A$15 billion in the last financial year, partly composed of wealth generated by their subsidiaries in New Zealand.