Emphasis On Bank Credit Restraint “Out Of Date”

Press, Volume CVI, Issue 31326, 23 March 1967, Page 1

Emphasis On Bank Credit Restraint “Out Of Date”

(New Zealand Press Association)

WELLINGTON, March 22.

New Zealand’s monetary and credit policies were out of date and failing to achieve their objectives, the research director of the Bankers’ Association, Mr R. O. Smillie, said today.

The policies need appraisal because they were causing harmful distortions to the financial system, were discriminatory in impact, and failed to promote efficiency, he said. “The banks believe it is high time monetary policy in New Zealand was brought up to date,” he said. “To do so would be to improve New Zealand’s standard of economic management.” Continued restraint on bank credit had led to the unchecked growth of non-bank credit and had diminished the importance of bank credit. CREDIT CREATION Addressing the Wellington Alligators’ Club, Mr Smillie said the belief was held in some quarters that the banks alone created credit. Bank credit was only a very small part of total credit. “Thj* fact is, almost any financial institution, trading company or person can extend credit,” he said. A comer grocer who allowed a customer a week or two to pay bills was extending credit. On a larger scale a manufacturer who supplied goods to a retailer without immediate payment offered trade credit. Credit was extended by finance companies, life assurance offices, stock and station agents, building societies, in the form of trade credit, intercompany lending, or direct lending by individuals. “In the past monetary and credit policy in New Zealand has concentrated on controlling bank credit while nonbank credit has expanded un-

hindered,” Mr Smillie said. “I say almost unhindered because in September, 1965, credit control was extended beyond the banking system. A series of voluntary restraints was negotiated.” In the past bank credit was the only type of lending considered to need supervision. Through the Reserve Bank and a tight-knit trading bank structure credit was easily controlled. “But the embarrassing fact is that stopping banks from lending doesn’t stop people from borrowing,” Mr Smillie said. “Borrowers go outside the banking system. In a developed country, with a financial system growing in maturity, complexity and diversity, there are alternative sources of credit.” IMPACT REDUCED Fifteen years ago bank restrictions alone had had some impact, but in successive squeezes since, the impact had been reduced. “For instance, so far as the banks are concerned, the present credit squeeze began about mid-1964,” he said. Monetary and credit policies had obviously proved inadequate to restrain satisfactorily the growth of private spending. The balance of payments position had continued to deteriorate. With the fall in wool prices, the Government had been forced to resort to fiscal measures as announced on February 10, with the prospect of more to come. The Monetary and Economic Council had made it clear that it was useless to intensify credit restraint—action was needed in other areas as well.

Although the trading banks had remained the main source of short-term credit their importance had diminished.

Before the Second World War banks were by far the most important financial institutions in New Zealand. Their loans and investments in 1935 were the equivalent of S 3 per cent of the gross national product.

This proportion had fallen to 23 per cent in 1955 and if present trends continued it would be 13 per cent this year. Similar trends had occurred in other countries after the war, but had since been reversed. In the United States lending to the private sector was 26 per cent of national income in 1955 and 36 per cent in 1965.