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Inquiry shows banks did not pass on full OCR cuts

11 November 2009 Media Statement

Banking Inquiry shows banks did not pass on full OCR cuts

The multi-party Parliamentary Banking Inquiry has confirmed that banks did not pass on the full effect of reductions in the Official Cash Rate to hard-working Kiwis struggling to make ends meet, says Labour Finance spokesperson David Cunliffe.

David Cunliffe said statistical evidence produced to the Inquiry showed that while most interest rates had fallen since the global financial crisis began late last year, major banks had not passed on the full impact of OCR cuts into short-term interest rates charged to customers.

“This failure was only partly offset by the banks’ higher offshore and domestic borrowing costs. Should current borrowers have to underwrite the risks and costs of previous lending to other borrowers --- especially when that lending might actually have been highly profitable?”

The three parties holding the Inquiry – Labour, the Greens and the Progressives --- today released the Inquiry’s findings.

“While wide-ranging issues were raised during the Inquiry, the report shows considerable agreement among submitters on a number of key banking and monetary policy issues,” David Cunliffe said.

“The Government failed in its responsibilities to hard-working Kiwi families and taxpayers by refusing to take part in a bipartisan Inquiry. The findings of the Inquiry have justified the initiative of Labour, the Greens and the Progressives in giving New Zealanders a forum to voice their views.

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“We were delighted with the calibre of the submissions we received from more than 50 organisations and individuals. The Government has wiped its hands of both its real and moral obligation, on behalf of homeowners and taxpayers, to insist that the major banks act as good corporate citizens.”

David Cunliffe said that the Inquiry also recommended more policy work to explore reforms to better align bank supervision, monetary and taxation policies.

“The Inquiry focused attention on what submitters identified as serious defects in current monetary policy, including ineffective control of credit expansion, an excessively volatile exchange rate which disadvantages exporters and the tradable sector, and perceived biases in the tax system in favour of buying property and against producing goods and services.

“The inquiry recommends more policy work should be undertaken to consider ways of making improvements in all these areas, as well as looking at international precedents for additional policy instruments the Reserve Bank might need to enhance monetary policy,” David Cunliffe said.

David Cunliffe said the Inquiry also believed it was important to set up multi-party dialogue to discuss a more balanced tax regime that encourages productive investment and discourages speculative purchase of housing property.

“It said that such dialogue would obviously have to take account of any recommendations from the Government-appointed Tax Review Working Group.”

Other recommendations include:

o That the Reserve Bank obtain and publish regular statistics on the cost of overseas borrowing by New Zealand registered banks, including details on the composition of this cost in relation to amounts borrowed.

o That the Reserve Bank prepare and publish a study on the flow of funds in the New Zealand interbank market.

o That the Reserve Bank undertake a regular survey amongst the business community to ascertain to what extent business owners finance their businesses on the basis of mortgage on their house(s), and establish empirically what the pros and cons of such capital financing are.

o That the Government actively consider increasing the capital funding of Kiwibank in order to promote more effective competition on bank lending margins, and contribute to a greater share of local funding of lending.

o That an appropriate agency conduct a full review of competitive conditions in the New Zealand banking industry

Facts and statistics from the Inquiry are attached.

The report of the Parliamentary Inquiry and submissions can be seen at http://www.bankinquiry.org.nz


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Facts, statistics and questions and answers

Background

The ‘big four’ Australian banks hold nearly 90% of banking assets in New Zealand. The three New Zealand owned banks hold 4% of banking assets.

What are the key findings of the Parliamentary Banking Inquiry? The major banks did not pass on the full effect of reductions in the Official Cash Rate to hard-working New Zealanders; higher borrowing costs do not fully explain the difference; weaknesses in monetary and taxation policy need to be addressed.

What is the status of the report and the recommendations? The report and recommendations are the product of the Inquiry team, drawing on input from some 50 public submissions. Its recommendations do not represent the policy of the three parties, but are likely to provide useful input into the future policy development of the parties.

Who participated in the Inquiry? All political parties in Parliament were invited. Three --- Labour, the Greens and the Progressives --- accepted. Other parties indicated they would decline, or failed to respond. National MPs had earlier supported calls for an FEC inquiry, but subsequently reversed their position.

Have the four major banks made a profit? The combined profits of the ‘big four’ Australian owned banks now exceed the combined profits of all other companies listed on the stock exchange NZX 50 series. In 2008 Banks earned $3.26 billion; the earnings of the NZX 50 were $2.89 billion.

Which banks participated in the Inquiry? Kiwibank appeared before the committee. The major banks did not. Given that they had publicly stated that had a credible story to tell, it is a shame they did not take advantage of the opportunity to participate in the Inquiry.

Did the Banks pass on the cut to the OCR? The Reserve Bank has cut the OCR from its high of 8.25% in mid 2008 to 2.5% today. The banks reduced interest rates by less than the fall in the OCR. A one percent margin in interest rates was not passed on to bank customers. One percent extra interest added $787 million to costs for New Zealand businesses; added $460 million to net interest costs for the farming sector; and (the biggest cost) more than $1.6 billion to mortgage repayments in the housing sector.

In 2009 bank lending for home loans rose about $3.2 billion (to $164.8 billion), while business lending fell by about $3 billion (to $78 billion). The effects on the farming sector have been negative. A Federated Farmers interest rates survey in June 2009 found that farm business overdraft interest rates had fallen an average of 2.68% since December 2008 while the OCR was cut by 4% in the same period.

New Zealanders have had problems paying their mortgages. In the five preceding years, Budgeting and Family Support Services experienced only one family losing their house in a mortgage sale. But in the first three months of 2009, fifteen families had already lost their home.

Have the Banks contributed to overseas debt and a housing bubble? In the past ten years, personal lending has almost doubled, from $60 billion to $105 billion. Most of the lending has been in housing. Home loans now make up 55% of bank lending, up from 35% ten years ago.

The banks borrowed more money to fund property price increases which contributed to a rise in overseas debt. Between 2003 and 2009 net overseas liabilities rose from 100.6 billion to $176.3 billion; that’s a rise from 76.8% of GDP to 98%.

What have the banks got to do with our volatile exchange rate? High overseas borrowing has impacted on the exchange rate which is subject to high volatility. The export sector makes up roughly 30% of GDP --- about $40 billion per year --- but suffers the most from currency instability which means uncertain returns.

Is the OCR an effective tool to help the economy? Raising the OCR to counter inflation had no discernible effect on inflation over the 5 years to mid 2008 when OCR rates moved upwards. The business sector has done worse at the hands of the OCR than the housing sector. The gap between the OCR and the business base lending rate has risen from 3.3% to 7.4% over the last nine years. But the gap between the OCR and the mortgage lending rate has only risen from about 2.2% to 3.9% over nine years.

ENDS

report_of_the_parliamentary_banking_inquiry.pdf

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