More Active Role For Banks Seen

Press, Volume CIII, Issue 30480, 30 June 1964, Page 16

More Active Role For Banks Seen

“After almost 25 years of far-reaching restrictions on their traditional activities, there have been encouraging signs over the last 18 months that the trading banks may be permitted to resume a more active part in the commercial life of New Zealand,” says the Bank of New South Wales in its latest economic review.

“During the period of growing demand In 1963, and even after signs of unwelcome pressure began to apoear early in 1964, the Reserve Bank, while holding trading bank liquidity on a very tight leash, acknowledged the increasing financial needs of the growing industrialisation of the economy and allowed a moderate increase in trading bank lending.

“Further, the Monetary and Economic Council, in its sixth report released early in February this year, recommended that the banks should be permitted to resume on a limited scale their traditional function of providing some longer-term finance to the Government through investment in government securities.

“Except for a special issue of £l2m in 1952, the banks have not been permitted to increase their holdings of these securities since 1941, and for some years were not even permitted to convert their holdings at maturity. “The council recommended that ■ increased holdings should be allowed to the ex-, tent that the banks increase their time .deposits over the amounts held at a given date. “The object of this recommendation was to provide the banks with' an incentive to seek these deposits actively as a contribution to the savings campaign. This recommendation has not yet been put into effect. “In operation it could do much to redress the unbalanced structure of New Zealand bank assets, and its adoption by the Government seems desirable.

Savings Banks

“A more direct manifestation of the trend towards a more liberal management of the country’s financial structure was given in the Government’s approval for the trading banks to establish savings bank subsidiaries in New Zealand. “The conditions agreed upon include precise regulation of all terms of operation and prevent operation in the region of newly established trustee savings banks for three years from their opening. “The entry of the new sav-. ings banks, expected later this year after the passage of the necessary legislation, should give a powerful boost to community savings and make a significant contribution to economic stability." “While hanking has operated in a more liberal environment in the last 18 months, the shift in emphasis in lending policy has been circumspect. “During the first half of 1963, advances rose only slowly, but in contrast to the previous year’s downward trend, and were generally well within the target figures indicated by the Reserve Bank.

“During the second half of the year, the pace quickened and the advances began to run beyond the Reserve Bank target. Higher Deposits

“This increase in bank lending, together with other influences from fiscal operations and the balance of oversea payments led to persistently higher bank deposits throughout 1963 as compared with the previous year. “During the period, in spite of its more liberal aims, the Reserve Bank continued to maintain a very close control over the trading banks’ operations. Reserve ratio policy was administered mainly to prevent the accrual of any substantial free liquid assets

in the hands of the banks. The frequency of the adjustments of the ratios—2l alterations were made in 1963—is an indication of the close supervision exercised.

“At various times, the most recent in May this year, the reserve ratios were raised in order to force the banks to borrow from the Reserve Bank when advances appeared to be increasing unduly. “Recently, the Reserve Bank has indicated its concern, not only with the level of advances, but also with the extent of unused commitments, which in the year ended March, 1964, rose by £ 15.3 m. “Past experience, however, has shown only a tenuous relationship between unused limits and the subsequent course of advances actually drawn,' and careful administration of current lending should be able to control the situation. Term Loans

“The schemes for term loans for medium-term capital purposes and export finance introduced in March, 1963, met a ready response from bank customers, particularly after the initial somewhat restrictive conditions for export finance were widened.-

“By the end of the year virtually all the original allocation of £4.6m, equivalent to li per cent of deposits released from reserve ratio requirements, was committed, but at that stage drawings amounted to only £2.5m. They have since risen to well over £3m.

“Although with an average term of slightly under five years repayments will yield an annual circulating fund of £1 million, the scale of demand for this type of loan necessitates an early expansion of the initial allocation to fill what appears to have been a significant gap in the financial structure,” says the review.