Finance move should lower interest rates

Press, 7 February 1985, Page 1

Finance move should lower interest rates

PA Wellington Finance institutions will no longer have to hold Government stock from Monday, and a longer-term result is expected to be a lowering of interest rates.

The Prime Minister, Mr Lange, said yesterday that the compulsory ratio system, which forced financial institutions to hold Government stock would be abolished. The action is expected to result in a lowering of interest rates and for home buyers in particular cheaper and more readily available housing finance. The 50-year-old system had amounted to “Government bludging on some financial institutions, and on the country’s small savers and borrowers,” said Mr Lange. Under the system, certain financial institutions have been compelled to invest fixed proportions of their total funds in Government and public securities, instead of making their own investment decisions. The requirement has applied to mainstream financial institutions, such as trading banks, trustee savings banks, building societies, life offices, and finance companies. However, a whole range of “fringe financial institutions” including solicitors’

mortgages, were outside the system, and had never been “subjected to its pains or its penalties,” said Mr Lange. The Minister of Finance, Mr Douglas, and the Minister of Trade and Industry, Mr Caygill, said in a joint statement: “This complicated array of controls is not serving any useful economic purpose. It is a serious obstacle to financial efficiency. It penalises both the public and the institutions alike. “Indeed, it is likely that the lower-income savers and borrowers have been the group most heavily penalised by the ratio system,- and there is no way that can be justified,” they said. Government sources said that for home buyers there would be less need to go to solicitors to get expensive mortgage money or to take out two or more mortgages when buying a house. People would be more likely to be able to get all their housing finance in just one larger loan, or two, but also at cheaper rates, with more money avail-

able. The new moves could also allow banks and other institutions to raise their interest rates paid to depositors while lowering rates charged to borrowers because they would be more efficient, they said. However, it was emphasised that there would be no sudden or dramatic change as it would take the financial institutions some time to adjust to the new system. The Ministers said abolition of the system should not be expected overnight to remedy “damage and inefficiency which had been inflicted on the financial system over many years.” “What we are doing will, however, free the institutions to readjust over a period and, in the medium term, achieve a new efficiency which responds better to the needs of their customers,” they said. Mr Lange said successive Governments had maintained compulsory ratios for two reasons. First, the Government itself set the interest paid, and used that privilege to

obtain money at cut-price rates. But that money did not belong finally to the banks or the institutions, but to savers throughout the community, said Mr Lange. Second, successive Governments had maintained the ratios because by varying the proportions demanded from institutions, they could, or thought they could, gain control of money-supply conditions. “In fact, however, investors are not all silly. Many of them simply switched their funds into fringe institutions or solicitors’ mortgages, which were not subject to such controls,” said Mr Lange. He said that because of the loopholes in the system, ratios were not an effective economic management tool. Among the bad consequences, many borrowers ended up with expensive short-term loans from fringe institutions.

“By abolishing ratios, we are taking a further step towards putting all financial institutions on an equal competitive footing, where their growth will depend on their own efficiency.”Reaction, page 9