Customers may pay for ‘free’ cheques

Press, 28 August 1984, Page 3

Customers may pay for ‘free’ cheques

By

MICHAEL HANNAH

in Wellington

Cheque account holders may have to pay for the extra cost of providing deposit interest rates on cheque accounts, if banks take advantage of the removal of interest rate restrictions announced yesterday. According to a banking source, the cost of providing cheque accounts is at present offset against the fact that no deposit interest is paid on them. The Minister of Finance, Mr Caygill, indicated that banks at present do not recover the full cost of cheque accounts and said he believed banks would not be in a hurry to pay interest on cheque accounts. However, competition for new cheque account holders between banks could, according to one source, lead first to the offer of free accounts to those who do not already have them, particularly if they have big deposits. It could later lead to paying interest on deEosits in cheque accounts, ut this cost may have to be met by higher lending charges or increases elsewhere. Charges on cheque accounts are frozen, making it unlikely that banks would add to the costs of the accounts until they could recoup some of the extra cost. Mr Caygill declined to

guess what interest rates on ordinary savings accounts and cheque accounts could move to as a result of the Government’s decontrolling of the market. “I don’t have a figure, because I think if I speculate on that, it will only help to set the market. I’m not anxious to do that,” he said. A bigger impact, however, could be felt on the short-term money market. This has up till now been the preserve of merchant banks and finance houses mainly, though any registered money dealer coming within certain qualifications — other than a trading bank, trustee savings or savings bank — could participate. The market covers cash flows of less than 30 days. In the case of big companies like Fletcher Challenge or N.Z. Forest Products, for instance, very big amounts of cash can move in a space of only two or three days, and the companies at present can place that money with a merchant bank or finance house for that short time and collect interest. Hence, the ownership of finance companies by companies like Fletcher Challenge. From August 31, trading banks will be able to compete in this market. Though they do not expect to attract all the short-term money, one source sug-

gested that trading banks could attract some of it by offering slightly higher rates than those offered by merchant banks or finance houses. Because of the size of trading banks, the cost of higher short-term rates could possibly be borne within the system without the need to raise lending charges, the source said. Moreover, trading banks may be keen to compete because it would provide another avenue for them to find,cash urgently, on the days they run short of ready cash. At present banks can borrow only between each other or go through the expensive exercise of discounting their Government stock at the Reserve Bank. The short-term money market could be cheaper than discounting particularly, depending on the going shortterm rates. The move, then, opens up the market to more competition. Other institutions have recently been allowed to discount their Government stock at the Reserve Bank, provided they can front up with ?1 million “parcels,” making that avenue more “open,” but no more attractive. Behind the move lies the Government’s decision to compete openly to finance its deficit. However, in opening up competition between private institutions — especially trading banks and

finance houses — the Government appears to have reduced the risk that all investment money would find its way to the highest bidder, generally finance houses. Mr Caygill confirmed that the removal of restrictions was along the same lines as moves taken in Australia recently. There, they had resulted in more effective competition between trading banks and finance houses. Mr Caygill said the measures announced yesterday did not herald a complete decontrolling of the financial market. The Government still had an interest, he said, in controls which exercised prudential controls in the marketplace. He cited the collapse of companies such as J.8.L., Securitibank and the P.S.I.S. as examples of what could happen if prudential controls were lifted or if institutions ignored the controls. However, market sources indicated that the Government could still take two further steps to free up the market. These would involve relaxing the credit growth guidelines, which at present limit credit growth, and relaxing foreign exchange regulations. Of these, the credit growth guidelines appear the most likely to go soonest, though possibly replaced by further, less strict controls.