Oral submissions conclude at Banking Inquiry
3 September 2009
Oral submissions conclude at Banking Inquiry
Oral hearings concluded at the multi-party Banking Inquiry today after a range of worthwhile submissions from organisations and individuals, Inquiry chair and Labour Finance Spokesperson David Cunliffe said today.
Submissions presented orally today included the Manufacturers and Exporters Association, Council of Trade Unions, the Family Centre of Anglican Social Services and the Mangere Budgeting and Family Support Services. These followed oral submissions yesterday from KiwiBank, Federated Farmers, Finsec, the Productive Economic Council and others.
David Cunliffe said today’s submissions from organisations and individuals reflected strong public concern at the apparent failure of banks to pass on all recent cuts to the OCR, and continuing concern at the impact of short-term interest rates on struggling New Zealand families.
“Three quarters of a percent of interest margin for a family with a $100,000 variable mortgage equals roughly $15 a week. That shows the level of potential impact that the failure to pass through interest rate cuts could have on New Zealand families.”
Other submissions to the Inquiry focused on the impact on business borrowing. These reflected wider concern about the effectiveness of the OCR as a policy instrument, the allocation of capital flows to the property cycle and the volatile exchange rate --- “all of which affect the ability of exporters to help New Zealand pay its way in the world,” David Cunliffe said.
Most submissions will be posted on the website ---http://www.bankinquiry.org.nz
A brief summary of key oral submissions
Parliamentary Banking Inquiry
Key highlights of Oral Evidence
• Kiwibank competition had helped to lower mortgage lending rates and increase interest rates paid to NZ depositors
• It had a strategy as challenger in the market to pass on interest rate cuts to our customers, said Kiwibank CEO Sam Knowles. The established big four banks have less incentive to compete than newcomers such as Kiwibank. Their strategy was to maximise returns from their existing customer base, as was typical of incumbents in a range of markets.
Interest.co.nz (Bernard Hickey)
call for change to tax policy to favour the tradable sector
rather than property speculation.
• Reduced OCR rates were (partially) offset by increased funding costs from:
- international wholesale borrowing
- higher local term deposit rates
- provisions for bad debts and other losses
- implications of new Reserve Bank liquidity measures (eg Basel II)
• Net interest margins for the “big four” banks were falling, not rising, on latest data.
• Banks are subsidising cheap mortgages with expensive business lending
• The boom-bust property cycle and resulting high level of national debt (140% of GDP, rising at 10% per annum) posed grave risks for the New Zealanders tradeables sector and sovereignty.
• Policy responses should focus on reforming rules rather than the players
Research New Zealand
• Small business has recovered some confidence said Research New Zealand economist Emmanuel Kalafatelis. However, finance problems loom large for them, since “as a group they are not financially sophisticated”. A number had registered issues with banking services in recent surveys.
Productive Economy Council
• Bank lending is distorted in favour of house price speculation, while business lending takes second place, said Selwyn Pellett, Chairman of the Productive Economy Council. In a period when bank lending went up 172%, business lending rose only 85%
• Mr Pellett said that exporters were being harmed by a higher New Zealand dollar exchange rate every time the OCR was increased. Higher local interest rates encouraged a capital inflow, which drove up the exchange rate and worsened the balance of payments. The OCR system needs to be changed, because of the small proportion of mortgages on variable rates; the lag on pass-through into fixed rates; failure to fully pass through OCR cuts; and the paradox that raising interest rates attracted more short term lending flows into the country.
• The NZ dollar was the second highest traded currency in the world as a percent of GDP, Selwyn Pellett said. Only the Swiss currency had a higher trade ratio. This over-trading in the Kiwi dollar caused high volatility in the NZ exchange rate. In contrast Singapore had a very stable trade-weighted currency, which benefitted its economy.
• The banks have not passed on all recent reductions in their borrowing costs, said Andrew Cassidy of the FinSec union.
• Andrew Cassidy proposed an independent consumer agency to supervise bank behaviour and deal with complaints from bank customers. A review agency needs to be fully independent of the banks, he added.
Business and Economic Research Limited
• BERL (Dr Ganesh Nana) submitted that the
OCR was no longer an effective link to market rates
- an average 2.2% difference between OCR and floating mortgage rates (04/99 to 04/08) had increased to 3.9%
- an average business lending rate/OCR gap had risen from a gap of 3.3% to a current 7.4%
• Bank margins were hard to calculate due to opaque data
• The breakdown in OCR as a tool was not new. Raising the OCR had “sucked in” hot funds chasing high notes, correlating with increased bank mortgage and business (including farms) lending
• This inflow of funds had worsened New Zealand’s foreign debt position, which was now (98% net debt/GDP) at very serious levels
• New tools were needed to regulate both the quantity and price of money. The RBNZ should be given explicit power to modify capital adequacy ratios.
Council of Trade Unions
Rosenberg, Senior Economist, CTU noted only 190/575 basis
points in OCR cuts had been passed through to credit cards,
and 50-100 basis points of OCR cuts to short term variable
mortgages appeared not to have been passed through.
• This was not easy to explain: New Zealand lending rates were recently higher than in Australia, despite our lower OCR. Until recently, data on impaired loans showed New Zealand banks had lower impairments than in Australia.
• New Zealand needed to reduce its reliance on offshore funding. The property cycle was making our current account deficit worse. Three quarters of total indebtedness was through bank lending.
• It is difficult to regulate both the price and quantity of money supply in an open economy, but New Zealand should consider appropriate ways of regulating international capital movements.
• Competition in the banking sector should be enhanced in part by increased government capitalisation of Kiwbank.
NZ Manufacturers and Exporters Association
• John Walley, CEO, NZMEA submitted New
Zealand’s worsening export performance and living
standards were linked to high exchange rate volatility and
conflicting policy settings.
• Bank margins have clearly increased, favouring property over business lending. Bank returns were increasing over time
• Kiwibank “was not yet big enough to be an instrument of policy” but had delivered value to consumers.
• The volume of money supply needs attention not just the price. The housing bubble was partially offset by capital gains taxes in other countries.
• Sustainable growth required fundamental policy changes to incentivise capital flows to productive activity rather than property speculation. Macro and micro policies need to move together.
The Family Centre (Anglican Social Services)
• Charles Waldegrave
underlined the dire situation of struggling families. Use of
food banks, incidence of family violence and child poverty
were linked to low incomes and unemployment. “15% of NZ
families were hurting”.
• Failure to pass through cuts to OCR in the amount of eg $20 per week on a $100,000 mortgage or rental.
Mangere Budget Advice
• Daryl Evans said budget stress was worsening. A family of four could provide food for $10 per day – so $20 per week of extra interest cost could have a critical impact.
• Loan sharks were a real problem
• Any policies to increase OCR pass through would assist struggling families.
property focus in NZ
• Too much debt
• Need improved financial literacy
• Tax laws grossly favour property
• House prices pushed up in relation to income
• Wants: capital gain; ring fence LAQCs; Tobin tax on financial transaction; new type of money system