THE MORATORIUM

Evening Post, Volume CV, Issue 141, 15 June 1923, Page 4

THE MORATORIUM

AS A BANKER SEES IT

"SYSTEM IS PERNICIOUS'

MORTGAGES AND DEPOSITS.

The moratorium , occupied an important seotion .in the speech of Sir George Elliot, chairman of the Bank of New Zealand, to-day. Dealing first with the moratorium on mortgages, he said whatever had been its advantages originally, and it had advantages, it had outlived its usefulness, as it was generally recogI nieed that its continued existence had an unsettling influence on ; land values in the Dominion and on financial conditions generally. "Before and after 1914 land was selling at high prices, price* which were not warranted by financial results; and larger sum 3 were borrowed than the actual values of the land warranted. It is understood that a number of mortgagors who are sheltering under the moratorium have made no provision whatever for the repayment of their loans when the Act expires, as the. prospect of an extension has lulled many of these borrowers into a false sense of security. Aa a consequence, they take the risk of holding all their land in the hope of realising at a price somewhere near cost, instead of getting rid of the whole or part, even at a loss. It is to be hoped, in the best interests of the Dominion, that no further. extension of the Act is contemplated by the legislature. "A GRAVE MISTAKE." "Indications point to considerable pressure being brought to bear on the Government for a further extension, but, in the opinion of the Board of Directors of the bank any extension would be a grave mistake," said Sir George Elliot, and went on to say: "It is true a number of mortgagors will inevitably have to face the result of ill-advised land purchases undertaken with inadequate capital; but, in the great majority, of cases, mortgagees may be relied upon to renew the mortgages at rates of interest proportionate to the security offered.

"In New Zealand it is estimated that well over two hundred millions are lent on mortgage, a great proportion of this being loaned by persons of moderate means. It is fortunate that little of this large amount has been obtained outside the Dominion, for, whenever it is repaid, it must naturally be reinvested here.

"Broad, acre freehold .securities have been looked upon from time immemorial as a most solid form of investment; but, without a doubt, the passing of the Mortgages Moratorium Act in New Zealand, necessary as it was at tha time, dried up to a large extent, the source from which moneys for mortgage investments sprung and drove investors to look in other directions for an', outlet for their savings. : ■ "Provided there is no further risk of legislative interference, and provided the margin of safety is ■ sufficient, mo»tgages' on freehold lands must again become as popular as they were in tne past, for they offer many advantages; they ensure repayment in a given period, and, in ordinary circumstances, there is little loss if reasonable precautions are taken. New Zealand, in common with all other parts of the Empire,. has, since August, 1914, passed through a phenomenal period. From time to' time circumstances have arisen that, have called for exceptional legislation. It is, however, now time to get back to normal conditions, for it has been proved over and over again that, as a general principle, legislative . interference with the natural ebb and flow of business has an ill-effect, reacting far beyond tha immediate present." SALVATION OF COMPANIES. Passing thence to the moratorium on deposits, the chairman admitted that action taken in that direction in 1921, when the financial depression set in, unquestionably was the salvation of many companies and firms which had been taking deposits from their shareholders, customers, and the public generally. The taking of deposits by traders as a general practice had grown in New Zealand during the last ten years to an extent unknown perhaps in any other country. A number of concerns had, as one side of their business, what was practically a banking department, and they used the credit balances and the fixed deposits of their customers to extend and enlarge their businesses. It was estimated or> the passing of the Moratorium Act that in New Zealand the total deposits with firms and companies, other than banking institutions, amounted to not less than' £10,000,000. Many depositors in these concerns believed that, in the event of liquidation, they had a preferential claim on the assets. This, of course, was not so, as depositors ranked in common with all other unsecured creditors for liquidation dividends. Others, who know the position, take the risk involved

for the sake of the half or one. per cent, more than they can obtain from banking institutions proper. TRUSTEES' PREDICAMENT. "Cases have come under our notice," remarked Sir George, "of trustees placing trust funds on'deposit "with trading concerns, ignoring the fact that they themselves would require to make good any loas that might be sustained on such transactions. There are, of course, exceptional cases, but, speaking generally, the system, is pernicious. It is dangerous to the lender as well as to the borrower. If business firms and depositors are prepared to take the risk, there is no reason why the system should be discontinued, provided—and this is tha point I desire to make—provided that traders who do a banking business be put on exactly the same footing as banks,; that is, they should be compelled by statute to keep a certain proportion of their assets in a liquid state in order to provide for the demands which may be • made upon them, and should be compelled also to pay exactly the same scale of taxation on the banking side of their business as a bank pays. Owing to the existence *£ the moratorium on deposits, those who have taken advantage of it have had time to get their houses in order. '. Most of them have considerably reduced their deposit liabilities by the issue of shares and debentures, but some have not done so, and it is to be feared they never will be able to do it. The Act exp.'res on 30th instant, and one cannot help hoping thafc- its existence will not be extended.