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BNZ (Bank of New Zealand) - Source: ONE News -
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How much pain is enough? That's the question facing the big four Australian banks that anchor our financial system. The Finance and Expenditure select committee last week gave voice to the grumblings of many businesses and households by saying that the banks should pass on more of the Official Cash Rate (OCR) cuts. They wrote:
We would expect that the banking sector would take on a greater role in sharing the burden of the current recession. Reducing interest-rate margins can help relieve the burden on mortgage holders and corporate borrowers. We consider that banks could further reduce interest-rate margins whilst maintaining an acceptable level of profitability.
To which most New Zealanders would add, "so say all of us". But on Q+A on Sunday BNZ Chief Executive Andrew Thorburn said that's exactly what the banks are doing. Thorburn said that profits at the large banks were down 18%. BNZ's own margins were down from 2.49 to 2.23, a reduction of 26 basis points.
Hang on, said David Cunliffe , Labour's Finance spokesman and a member of the select committee. The banks are including their added provisions for voluntary bad debts into that number. Take that out and bank profits are actually up.
The point Cunliffe is making is that banks profited in the good times by extending loans that are now coming back to bite them. They over-reached, and have to deal with what are called "impaired assets". Now they're covering their backsides and we're paying for it in the form of higher interest rates. Cunliffe reckons that the banks took risks and made generous profits in the good times, so they should wear the weaker profits in the bad times and not pass the cost of rebuilding onto their customers. He has a point.
The banks argue that they can't lower rates any further because they need to keep deposit rates high to attract the very money they need to loan out. It's the money circle: If they don't get the deposits in, they can't make loans out. Cash is really that tight. And they have a point.
So that brings us back to the question, how much pain are the banks expected to carry?
We should be pleased that, as the select committee found, we have some of the most stable and profitable banks in the world. In the US and Britain banks have fallen over, and the misery compounds like so much in interest. But then our suspicious minds kick in. If our banks are amongst the most profitable in the world, does that mean they're profiting while the rest of us are battling to stay afloat? That doesn't seem fair.
Caught between the desires of their shareholders and the desires of their customers, the banks seem to be choosing the shareholders. And that's not a good look. No wonder Kiwis are heading to Kiwibank and its lower floating rates in large numbers. We want to see the banks alongside us in the trenches.
There is one option the banks have that hasn't been discussed much, and that's to reallocate their costs. One of the main reasons for banks not passing on more of the OCR cuts is that the cost of borrowing offshore is expensive.
The banks borrow most of the money for their long-term lending offshore, where the OCR has no influence. The OCR has more of an impact on short-term loans. So the banks could raise their long-term rates to reflect the cost of borrowing and cut their floating rates, giving Kiwis coming off fixed term mortgages some relief during the worst of this recession.
That would at least buy those bankers some time to figure out
how much more pain they can bear. Because New Zealanders are
watching, and the banks should be in no doubt that when the good
times return, we'll remember who bore the brunt with us. And who
didn't.
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