Big bank profits the price for stability, Bollard says

Alan Bollard

BUSINESSDESK: New Zealand's big four Australian-owned banks earn more out of the nation than those in most other countries, but that is the price that must be paid for a sound financial system, former Reserve Bank governor Alan Bollard says.

Regulation of the big four banks – ANZ National Bank, Bank of New Zealand, Westpac Banking and ASB Bank – has improved during Dr Bollard's decade-long tenure and lenders have been efficient and dynamic, he says in an interview for the Reserve Bank Bulletin.

Still, he questioned why the banks continued to post earnings that are "large by most standards".

"Banks are learning to live with lower returns, although they are still higher than in most other banking systems," Dr Bollard says.

"Banking is an industry you want to be sound so you might be well prepared to live with a degree of allocative inefficiency – part of which may arise from an implicit subsidy of the system by the government – provided what you are getting in return is soundness and guarantees of soundness, which I think we are getting." 

According to Reserve Bank data, the big four locally incorporated banks' aggregate net profit was $2.78 billion in the 2011 financial year, the most since they collectively made $3.02 billion in 2008, before the global financial crisis.

Dr Bollard says the dominance of the big four created some barriers to entry to New Zealand's banking industry as a new player needed to have an economy of scale to access foreign funding.

"It will be interesting to see how institutions like Kiwibank attempt to overcome these barriers, but I'm not sure there is a strong case for regulatory intervention," he says.

Earlier this year, KPMG's annual Financial Institutions Performance Survey found lenders' interest margins improved slightly over 2011 to an average 2.2%, compared with 2.09% in 2010, while the ratio of after-tax profit to total average tangible assets rose to 0.86% from 0.74%.

Dr Bollard officially finished his term earlier this week, replaced by former World Bank executive Graeme Wheeler.

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I call BS.

The big bank profits are what is hurting the economy, it is why the country is not growing as fast as it should. In what crazy world is it better for paper shufflers to be profiting on the back on an ailing productive sector?

The average guy is not getting ahead precisely because the big banks are making big profits at our expense. I thought this guy understood money? How much simpler can it get before the economic boffins wake up to what they have wrought?

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How exactly are big bank profits hurting the economy? It's exactly because the banks are making sound profits that this country's economy is stable! If the big four weren't making the profits they do, then the first thing they would do is lower their risk.

Now lowering risk means a tightening of the purse strings; albeit tightening of lending ratios. If banks then weren't going to lend, the businesses couldn't expand, nor could many new ones start.

And those so called "paper shufflers profiting on the back on an ailing productive sector" would in fact be re-investing in the productive sectors, helping them grow further!

Not such a sound argument, but maybe you're annoyed at "the Man".

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And yet another one that has bought into the cart before the horse economics.

First you have to explain slowly and clearly, to yourself it seems, how is that an economy grows?

It is very, very simple, at the root of all growth it is the produces of wealth that grow an economy, not the managers of wealth.

Having 'booming' managers of wealth is not the same thing as growth, as they must be parasiting it off the real producers of wealth (since they themselves do not produce wealth), denying real investment and long term wealth creation, i.e. growth, by the productive sector.

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crazy stuff. The whole safety of the system is around deposits. And yet it is the shareholders who get the free lunch due to the implicit taxpayer guarantee of bank deposits. They should be regulated whenever that is in the national good soley for that reason. The whole system is based on supply and demand. Rabobank arrived. why would not others if the demand was there. But is the regulation right? Every economist is banging on about efficiency and productive markets and yet it seems to be OK in the banking sector to allow a little inefficiency/protectionism that only serves to line the pockets of sharehodlers and bank executives all in the name of we, who give the bank guarantee, will surely be better off!!!

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What about Pre tax profits to net equity
30% plus

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Regrettfully,Bollard,prompted by his political masters, did untold damage to the NZ economy during his tenure.
He followed Key's direction to keep interest rates low rather than going on the front foot and increasing rates to levels that would attract savings and thus start to build some domestic investment capital,without which we have no hope of getting off the overseas funding of our deficits treadmill.
We do not seem to have any understanding of this amongst our policy makers;more's the pity.

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Surely you would agree that the only legitimate reason for increasing the OCR would be to keep tabs on increasing economic growth. Since there has been little growth over the medium term it is hard to see any justification for increasing the OCR. Moreover, interest rates are comparatively high in New Zealand and any further increase would surely send the NZ dollar through the roof.

Rather than simply throwing ones hands up at the "lack of understanding amongst our policy makers" I suggest we grow up and acknowledge that role of the Reserve Bank Gov is an extremely difficult one. Every decision has upsides and downsides, it is a case of trying to strike a balance.

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