BANKING SYSTEM

Evening Post, Volume CXVIII, Issue 65, 14 September 1934, Page 10

BANKING SYSTEM

"NO CONSCIOUS POLICY"

OVERCOMING DEFECTS

• The report contains criticism of tlio banking' policy which has been pursued,, ana considers that it was the recognition of fundamental defects in the banking system which led to the establishment of the Reserve Bank by the Government. - "In the past the fundamental weakness in our banking organisation." states the report, ".lay in the'fact that its control rested in the hands of six independent boards of directors, only one of which possessed a head* office in New Zealand. New Zealand monetary affairs were thus largely controlled from Great Britain and Australia, where the remaining: five boards, are situated. Furthermore, these six banks aro commercial institutions, and as such are naturally primarily concerned with earning profits for mfir - shareholders., , "In such circumstances it is clear that the trading banks could not have any definite or conscious monetary policy designed particularly to promote economic stability and.the general wel- ' faro of the people of this Dominion. The banks act together" in fixing rates, but there is strong competition among them i for business. As a result, the tendency has been in the direction of over-advancing in prosperous times to obtain the maximum amount of revenue and too drastic curtailment to avoid losses :as far as possible, when conditions became adverse. Action along these lines and the general lack .of a co-ordinated financial policy wcro obviously not in tho interests of the country. Recognition of the funda-'-•vftiental defects referred to led tho Goyewiment to take action in the direction oi*V\tablishing a central bank, and as' soon as"-the bank becomes firmly established tfiese defects should be . overcome. ; VOLUME OF CKEDIT. "The present volume of credit appears to be ample, and what is required is a means of inducing people to make greater use of the resources available. The normal method of doing this is to lower bank rates of interest. Lower deposit rates would stir depositors to seek a.greater return in- a more active use of their funds, and would permit a further reduction in overdraft rates. The combined effect would greatly stimulate business and generally do muck to assist in overcoming the present stagnation. Tho rosult could) not fail to-be of great benefit to the Dominion in present circumstances. "In this connection, it should be noted that a reduction in overdraft rates would not.only induco fresh borrowing for productive purposes, but appreciably lighten the present interest load on industry. For instance, on £50,000,000 of' advances a reduction of the rate by 1 per cent, would mean a saving in costs of £500,000 per annum, arid tho aggregate saving would be.much greater than this, for the lending rates of stock and station agents and other institutions would bo reduced concurrently. With idle funds accumulating in the Dominion longterm' lending rates, as evidenced by the market return on Government and local-body securities, has declined sharply in recent months. The-return on Government securities is now less than 3§ per cent. Owing probably to tho fact that there is no organised short-term loan market in New Zealand, short-term rates have not fallen in anything like the same ratio; but the transfer of a largo amount from London by the Government will give considerable impetus to the movement. "In any case, we consider a further substantial reduction in bank overdraft rates is : essential. The Committee considers that, in present circumstances the overdraft rate, for firstclass accounts should be reduced ,to 3$ per cent., with a maximum of 5 per corit. for other accounts. BILLS AND PROMISSORY NOTES. ' "Tie operations of the Eeserve Bank would be facilitated if more use were made of bills of exchange and promissory notes in internal trade. Furthermore,, tho use of negotiable documents instead of bank advances should cheapen the cost of credit for trading.operations. The difficulty with the overdraft method of financing transactions for' tho production and sale of commodities is that the loan is not necessarily automatically paid off when tbo transaction is completed. In good times many banking institutions would not encourage a farmer to pay off his overdraft as long as interest was forthcoming. The result often was that the farmer and the institution got into diffi'ctulties.when the apparently inevitable slump came. The method of financing

production and sale of goods by overdraft was profitable for the financial institution, costly to tho borrower, and often not the soundest of operations.

"The trade and agricultural bill if" more negotiable and therefore cheaper, is definitely based on production coming forward to the market, and is selfliquidating. In the interests of trade and finance the Reserve Bank will doubtless encourage the more extensive USO of bills. If discount rates are cheaper than overdraft rates, and the advantages of bills becomes more generally appreciated, ingrained habits will be overcome, and greater use will be made of this handy form of finance STOCK AND STATION AGENTS. "Deposit banking is not confined to the six trading banks. A number of stock and station agents and other institutions not generally recognised as banks make a practice of taking deposits withdrawable by cheque or equivalent order. Further, it is understood that some of these same institutions also do exchange business. Such institutions are carrying on banking business in. direct competition with tho trading banks without any of the safeguards or restrictions imposed, upon the latter. , "If the Reservo Bank is to carry out its-functions successfully, it must have full information in regard to, and the same measure of control over, the banking operations of all institutions. Furthermore, in the interests of depositors and financial stability generally, it is desirable that such institutions ■should disclose their financial position and contribute to tho pool of liquid resources held by the Reservo Bank in support of the banking system generally. In time of trouble .the Reserve Bank would probably have to come to the assistance of any such institution, and ' for that reason alone it should have full knowledge of its operations. ORDERS ON FARMERS. "It is realised, of course, that stock and station agents in particular specialise in financing farmers, and do classes of business that would not be undertaken by the banks. In addition, these firms buy jmd sell stock, handle produce, and do a general business quite apart from their banking activities. This difficulty could be overcome, however, by segregating the banking business if it is to' be continued, and dealing with it separately. It may be added that it would not seriously, prejudice the business, of financing farmers if tho provision for the issue of cheques or orders was discontinued, and this perhaps would! be the best solution.

"The published statistics disclose that for the quarter ended March 31, 1934, 603 trading companies held deposits amounting to £5,988,115. Those companies include stock and station agents, referred to above. The most unsatisfactory feature is that £3,292,740, or nearly two-thirds of the- total, repi-e----sont deposits at call. As the majority of the firms use tho funds for. trading purposes, and do not hold liquid resources, the position is far from being a sound one. In fact, it might at any time constitute a danger to tho stability of the monetary system. In most cases tho deposits appear to havo been accepted in lieu of obtaining advances from tho banks, tho rates of interest paid being from I per cent, to 1 per cent, below the overdraft rate ruling at the time. Thus rates as high as 6 per cent, and 6J per cent, are being paid for deposits at call. Tho wide disparity (between 2 per cent, and 3 per cent.) between bank deposit rates and overdraft rates is probably the principal cause of this unsatisfactory position, and a lowering of tho overdraft rate, in addition to being of general benefit to the community, would doubtless be a powerful factor in bringing about a sounder state of affairs. The organisation of a short-loan market on proper lines will also assist, but that is a matter that can only be accomplished gradually. '