‘Borrowing short, lending long’

Press, Volume CXIV, Issue 33577, 4 July 1974, Page 2

‘Borrowing short, lending long’

(By the commercial editor)

The situation leading to the downfall of the Cornish group of companies is a classic example of the danger of “borrowing short and lending long.”

Borrowing money for shorter periods than those for which you are lending that same money hardly ever works in the long run. However, in the short run, in times of great economic prosperity, it can be very profitable.

In finance and banking, which is essentially the business of chanelling savings (which these institutions borrow) towards investment projects (for which they lend) borrowing short and lending long is regarded as an unwise policy.

It may not be bad management in the sense usually associated with those words, but a banker would be sacked for doing it. However, the Cornish

group had been doing it for years, and of its total borrowing from the public of $ll million, about half was in "short call” or “call” deposits. Investors may withdraw such money on very short notice. With the Interest on Deposit regulations in 1972 the situation became more difficult for the group, and the Reserve Bank has been watching the situation closely for two years. However, the situation was brought to a head by the severe credit squeeze, with money extremely hard to come by and interest rates

soaring in the unregulated areas.

Depositors withdrew their money, and very little came in to replace the funds on which the company was heavily dependent, and so the group got into the present difficulty.

New Zealand investors have clearly shown in recent months that they are in a very pessimistic mood, and there was a danger that the collapse of the Cornish group might cause panic in the money markets through a wholesale withdrawal of short term funds.

The Government, acutely aware of this, lost no time in introducing emergency legislation to avoid this.

Most of the financial institutions in the country are unlikely to be caught in this way, in spite of the difficult credit situation. But it is propel that the Government

should act promptly to reassure the public. Although as a general principle it would be unwise to protect investors from their own follies, at present the national interest is best served by maintaining confidence. It is being said more and more that company collapses have been increasing of late. This would- appear to be unfounded. There have been a number of failures by large New Zealand companies in the last decade, and for a variety of reasons.

Names which immediately come to mind are the Whangarei glass works, the Standard Insurance Company, Enslow, N.Z. "Sea Products, and JBL. Most of these occurred in a buoyant economic climate.