09 February 2010

Banking expert confirms: 'Bank customers were never concerned'

Today's news article 'Deposit scheme 'useless' ' confirms what I've been saying since the Crown Deposit Guarantee Scheme was introduced: The big banks didn't need it, even at the height of the crisis, and sure don't need it now, and its only function was to prop up risky finance companies that should have failed.

Mr Dinsdale [KPMG] said the banks should not be taking part in the extended scheme.

"There is no benefit to it. It is a cost the customer doesn't need to bear. There is no risk for a customer.

"If I was a chief executive, I would be saying: `there is nothing wrong with my bank, I am very comfortable with our risk profile and our credit position, we don't need a retail guarantee and we don't believe it is in the customers' best interest'."

Bank customers were never concerned about profitability or the risk of the banks losing vast sums of money during the financial crisis, Mr Dinsdale said.

Nor was there ever a real risk of New Zealand bank customers sending their money to Australia, where deposits were being guaranteed.

Instead, the guarantee supported the failing finance company sector, Mr Dinsdale said.

This is a good correction for some of the popular errors such as this one that I have already addressed before from Stuart Nash MP (Labour, list):
The reason for that, as has been outlined, is that there was a belief that if the Australians had set up such a scheme and New Zealand had not, then there may be a run on funds from New Zealand banks across the Tasman, therefore necessitating the collapse of the New Zealand banking sector.
I don't know why the NZ CEOs of the big four Australian owned banks signed up for the guarantee in the first place. If I was in their place, I would have pre-empted my competitors by announcing that my bank neither needed not wanted it, and that I challenge my competitors to confirm they don't need it either by not signing up either. This could have kept 90% of the NZ banking system out of the scheme, and shown the guarantee for what it was: a prop for risky finance companies that should have been allowed to die.


Anonymous said...

I don't think anyone is saying the guarantees should not have been introduced, just that the Wholesale Guarantee has served its purpose and that banks do not require the support of the extended Retail Guarantee either.

If you talk to Bollard or banking executives you will understand that at the time the Retail Crown Guarantee was introduced it was very much required.

Shaun said...

The retail guarantee should never have been introduced, the wholesale guarantee I think served a purpose for a very short time.

Of course Bollard and the Bank execs (you've spoken to them I assume)would say it was required because it became an overnight gravy train for the banks, and the finance companies (all of those would have gone under by now and never deserved to be saved).

Anonymous said...

I am not sure how the retail scheme has been a "gravy train" for banks. Given your and David's logic that the banks didn't need the gtee in the first place I am sure they would have preferred to hold on to the tens of millions of fees they have paid to the Crown. Doesn't sound like a "gravy train" to me...

Disclosure: I work for a finance company and therefore will not comment on the impact the guarantee has had on sector other than to say not all finance companies are the same.

David Hillary said...

thanks for taking the time to comment, those who have commented so far, I get quite a lot of visitors but not many comments so thanks.

Anon 1, the RBNZ and Treasury said it should not be introduced at all, 2 days before it was introduced. Why was it introduced? I honestly don't understand the motivation, agenda or the politics, but I suspect it has something to do with our culture of 'guardian' instincts for those in power. I have tried to engage BNZ on whether they were in trouble, expecting or hoping that someone there would be motivated to assert their strength, but I never got a reply from them.

From all three comments it appears there is no support for the retail scheme, and the idea that the wholesale scheme was needed for a short time. I can't agree with the second point for several reasons:
1. As I have pointed out many times, both before and after the scheme was introduced, the big NZ banks retained access to the wholesale US CP market for funding. Yes they raised less funds and yes the price of the funds was higher, and the term shorter, but the perception out there is that the markets were closed or frozen, this was not the case. It appears that banks were only able to raise overnight funding, and were therefore obliged to roll over their funding every day. However, since the NZ big banks didn't have any problems, they could realistically just keep rolling over the funds every day as long as they wanted. CP market investors still had funds to invest, and top rated banks from Australia and NZ overnight investments are actually probably quite attractive compared to structured finance securities of many types and US banks and lower rated industrial companies, so this is not surprising that they retained access while other CP market borrowers were being shut out.
2. Even if they were shut out of the market, that does not mean that they had no other funding options. For example selling assets to their parents, borrowing from their parents, using RMBS as security for RBNZ (or other) borrowings etc.
3. Economic theory (or economic modeling of the NZ banking sector) would suggest that its function is to source funds on the international market and distribute it primarily in residential mortgages. Basically the big banks are importers and retailers of credit sourced on the international market. If the market price of such credit goes up, the NZ banks can just pass on the price rise on floating rates, and fixed rates on expiry. This is the market solution to stress: price and quantity changes. These adjustments are the way to avoid more harmful adjustments such as shortages and rationing and failures of intermediaries. (continued next comment)

David Hillary said...

(continued from last comment) Part of the motivation for introducing the scheme (wholesale and retail) was to hamper such adjustments to market prices and quantities of credit on main street and the mortgage belt (see my post about the meeting with David Bennett, MP).
4. The failure of a big bank is not something to be prevented by government financial assistance in any case. It is not 'necessary' for the government to prevent an impending failure from occurring, and I think, inasmuch as the government should be involved, it should be involved to require large banks to have the capacity to creditor-recapitalise within 1 business day (the RBNZ crisis manager told me he thought a creditor recapitalisation of a large bank could have been done in 2008 if required, however it would be worth the compliance cost, in my view, of making it a requirement, so that in the event of such a failure the RBNZ can confidently advise the government that it can and should execute such a restructuring, so that the government isn't held over a barrel concerning the resolution of such a failure. (ideally I'd take banking supervision off the RBNZ and put it to trustees, so that they rather than the government would be responsible for resolving such a failure/recapitalisation, but that's another story).

And, by the way, I don't want to be seen to be negative on the finance company sector, or to suggest they would have or should have all failed without the guarantee scheme. I would of course leave that to the investors as to where they want to invest, and would not expect all of them to fail at the same time, even if many do. Without the guarantee the worst fail, leaving more funds and more profitable business for those that remain.

Shaun said...

I would like to know which Finance companies anyone thinks would have survived without the retail guarantee scheme, it may be a mute point, but even the perceived best were facing runs on their liabilities.

It has been a gravy train, those costs are passed on, and if fact 1 beef I had was that it is a retail "deposit" scheme, but it was the banks borrowing customers who footed the bill, not the deposit customers. It allowed a blurring of the Cost of Funds line to their borrowers, you only have to look at how quickly they have returned to profitability.

David Hillary said...


I understand the consumer financiers have fared a lot better than the property financiers, in the finance company sector, and I believe that although practically all finance companies have been under pressure, there was still discrimination by investors within the sector.

There is also a distinction to be made beteween a) the market and b) a particular business model. During a preiod of stress or change, a) will adjust and continue, while b) may die (i.e. all providers of the same business model may die within a short time and due to the same causes). Within the finance company sector, there are many business models, and for the finance companies and their investors which are viable is not a moot point.

Regarding the burden of the scheme between investors, financial institutions and borrowers, such an estimate is more economics than accounting. At the same time as the schemes were introduced, the bank's costs of funds went up and depositors have been enjoying higher premiums over the OCR when investing in big NZ banks, and borrowers are paying higher premiums too. Within the market there are linkages between costs and prices and profits, and market adjustments spread impacts around. The most undesirable impact is the transfer of credit risk from financial institutions and investors to the state.