Comment: opposition’s bank inquiry naked political grandstanding

David Cunliffe and the opposition parties saying they are “concerned by high interest rates” at a time when interest rates are at historic lows may have sent a signal to some readers that something fishy may be in the air regarding their proposed banking profits inquiry.

While the opposition parties are ostensibly hoping to lower interest rates and / or educate the public about how pricing is set in our banking system, a ‘banking profits inquiry’ would be one of the least efficient ways to achieve either.

Drawing on public concern at the fact that most people don’t have as much money as they used to and are increasingly losing their jobs, our politicians are under pressure to be seen to do something - and it’s always easy to look for someone to blame and break out the time-honoured whipping boy, the bankers.

Rhymes with... ?

See – that easy.

Unfortunately this time, the banks aren’t the bad guys we’d all like to assume they are.

Firstly, the pure fact of the matter is, no matter what this inquiry finds the banks are under no obligation to do anything regarding its findings. The opposition aren’t in government, so they can’t make a law obligating the banks to set a certain profit margin or anything else for that matter.

The Commerce Commission is the correct body for any investigation of anticompetitive practices.

So failing a mass movement of ongoing, organised protest and boycotts, the banks will just look at the report and collectively say to themselves, ‘So what? We can set whatever prices we like. It’s a free country.’

Secondly, the information the opposition parties are searching for is already publically available, if somewhat arcane and not widely disseminated.

The cost of bank funding is a mixture of the local wholesale funding from the OCR, (roughly two thirds), and overseas borrowing from other banks (one third, apart from Kiwibank obviously), with the rates banks have to pay for local customers’ deposits lumped in with OCR borrowing.

The last funding source, bank deposits, has become increasingly significant because of the Reserve Bank’s recent changes to prudential regulations, which have imposed greater liquidity requirements in a bid to keep our banking system stable and resilient to funding shocks.

Translation = banks have to have a larger amount of money in their vaults relative to what they can lend out, which means to be competitive they have offer higher interest rates to savers, which means their costs go up.

Before the new prudential regulations deposit rates used to sit a bit below wholesale interest rates, or the OCR – but now deposit rates sit above the OCR, government bond rates, and swap rates.

(That’s the other side of this story, what you give to borrowers, you take away from savers).

As has been noted at length by the NBR and others both here and abroad, interbank lending rates (the overseas borrowing bit) have spiked through the roof during the credit crisis – if you could even access funding, which many couldn’t – and while they have declined from their peak, still have a way to go before they’ll approach pre-credit crisis levels.

What all this adds up to is a progressive decoupling of the cost of bank funding from the OCR – so its use as a policy instrument has become progressively dulled and the public’s perception that there is a direct link is just plain wrong.

Thirdly, it’s a relatively simple exercise to examine the banks’ balance sheets and see what their profit margins are – the big four are all publically listed companies, and all have to report their revenue and profit in detail.

People have done this already. What did they find? While they are profitable, New Zealand bank’s profit margins have actually declined in the last 12 months, just like most of the rest of the economy.

When spoken to by NBR Mr Cunliffe even conceded that, “There’s no doubt the costs of funding from domestic savings have increased, and there’s also evidence that the cost of funding from interbank loans have also increased in light of the international recession, so that’s why I’ve been careful to say that we’re talking about a prima facie issue.”

If Mr Cunliffe can see that the banks’ costs are what’s driving the lack of interest rate pass-through, what purpose is this inquiry meant to serve?

Well, Mr Cunliffe goes on to argue that “there is a win-win in improving the public’s understanding of the issues, and these are matters that people feel greatly concerned about.”

He’s right about people being concerned, but he yet to explain how an inquiry into banks' profits is the best way of diffusing inchoate public anger at hard times with a simple explanation of bank funding costs - like this article is attempting.

Given the above, for Mr Cunliffe to point to OCR cuts of 575 basis points and complain that only 250 basis points of that has been passed through is just plain disingenuous, and points to a malicious misuse of public funds.

He must have been taking notes from National’s playbook while it was in opposition.

The banks NBR spoke to are keeping mum on the issue until more details are made available, but even when the full scope is revealed they will be careful to play along with the charade and not stoke public anger by showing the contempt they will be feeling towards this nakedly political exercise.

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11 Comments & Questions

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Labour's grandstanding is just that. They had 9 years of economic mismanagement to fund ideological social re-engineering policies that failed miserably... and now that they are in opposition they have all the answers!

Labour are just making "noise" so their main base of supporters can "see and hear" them doing something - even if the vast majority of their supporters don't have the intelligence or motivation to understand what's being said or even comprehend the real issues.

If Labour really wanted to achieve something great for NZ - they should prima facie charge Cullen & Clarke with economic treason against NZ as they attempted to progress their ideologies!!

Either that, or leave Goof and Little at the helm - as that's certainly helping NZ and National to be more effective.

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One thing this 'Opposition Independent enquiry WILL highlight, is the financial and economic ignorance of the Grens, Labour and Big Jim.
They are seeking publicity in a vacuum of ideas; and the foolish media are cooperating with them. by reporting such ramblings

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At least none of them have gone to "Dancing With The Stars" to boost their profile....

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why don't they when next in power set up a bank and call it Kiwi Bank. Because this Kiwi Bank will be so popular because of its good rates, the other banks will go out of business. Have I missed something?

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The article and the comment overlook completely what the Opposition Spokesman is trying to do. From the Greens Progressives etc are pushing Cunliffe to make promises to use regulations to bring down interest rates. By holding an enquiry and getting the banks to put their side in writing, before a committee of parliamentarians, he hopes to educate his colleagues in the facts of life. David Lange and Geoffrey Palmer achieved something similar when their governments put MPs, formerly union officials, on the committee that reviwed the Reserve Bank Act. In each case, once they had heard the evidence they ended up in support of the bill and a responsible monetary policy, much to the displeasure of their union sponsors!

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Interesting points Mr(?) Observer that I hadn't considered, but again - like educating the public, why does educating colleagues require a parliamentary inquiry, rather than circulating a memo?

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I totally agree.
The comment Bankers rhymes with...... reminds me of the old Irish joke.
Why do the Irish call their currency the Punt?
Because it rhymes with Bank Manager!

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After reading the latest INVESTIGATE MAGAZINE report on YANG LIU and Labour Party involvement and culpability lets have an inquiry into the alleged corruption of three or four Labour Government ministers .,NOW THAT WOULD BE A REAL INQUIRY?who has the moral turpitude to put that in train.

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Please stick to the topic, thanks.

Mitchell

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Sounds to me some people dont like the cold steel ,i believe ANON is quite correct the subject is about inquires,not fictional ones with no substance.

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Look Samantha, please keep it on topic or I'll have to delete comments. Fairly simple and reasonably I would have thought.

Thanking you,

Mitchell

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