RESERVE FUND

Evening Post, Issue 29, 4 February 1935, Page 13

RESERVE FUND

STKONGr OBJECTIONS

BONDS AND SHARES

"Tlio committee is by no ;hc-ans satis- j fied with the provision for the creation | of a reserve fund. ..-As the committee j understands the position, the Crown proposes to lend the .Corporation! £2,570,000 worth of • local body deben-1 tures. These debentures will not be the absolute property of the Corporation. Not only will ,the interest payable in respect pf these debentures continue to be paid to th« Crown, but when the contributions from borrowers of the Corporation' ..have built up a reserve fund amounting "to 10 per cent, of advances .made by. the Corporation, these debentures must be returned by the Corporation to-the Crown. AN INSURANCE FCNO. "In these circumstances the committee is of opinion'that these local .body debentures should; not be shown on the Corporation's, balance-sheet as a free' asset; .'.they- really ■ constitute an insurance fund to. indemnify, (until the Corporation's reserve is built up to .a figure which the Minister considers adequate for this purpose) the bondholders and shareholders. of the Corporation against having to bear losses made by the .Corporation in its early stages.. ■.-•<; ■• . • ' , '"While these debentures do, in some measure, constitute "a, "'reserve fund (which we prefer to describe 'as an insurance fund) and consequently may Rive more confidence to the investing public, the committee is very'strongly of opinion that to include .this amount of £2,570,000 in the computation of the maximum permissible bond issue, would be wrong in principle and unsound in practice.

"As regards the reserve fund proper, it is apparently not' intended that the borrower's contribution of 2 per cent, will be paid iji cash, but that it will be added to. the mortgage.to be paid off with interest over the period of the loan: It seems clear that in time of stress this nucleus of the reserve fund would- definitely be not liquid and would therefore fail to meet the very first requirement "of an adequate re serve fund.- " CAPITAL AND RESERVE. ■'• "'Mortgage bond* business is not a novelty, even in New Zealand. In recent years the Bank of New Zealand added to its activities a long-term mortgage department " Overseas, and particularly •on ithe. Continent, 'mortgage .bond' associations Have been in existence ■ for rnahy years. "The proportion of bonds to share capital, plus/reservesl has, following on years of experience become stereotyped. We .understand- that with ■ all the old Established 'mortgage bond' institutions on the Continent and in America, the maximum bond issue varies in proportions from 13 to 1 to 15 to 1.•

"The pamphlet proposes that the Corporation may issue bonds to the extent of twenty times its capital and reserve. . This is a- larger proportion than the committee considers wise and .prudent, and it-is a long way removed from British precedent.

"We would point out that as recently -as--eight years ago our own Legislature saw (it to limit the bondissuing authority,of the Bank of New Zealand to three times the amount of the relative capital (see Section ID,

Bank of New Zealand Act, 1926), and this was done,, although the bank had, apart from its long-term mortgage department, very substantial resources. CROWN PREROGATIVE. "It occurred to the committee that so long as the Crown was the holder of bonds, or was otherwise a creditor of the Mortgage Corporation, the Crown might exercise its prerogative | in a winding-up of .the Corporation to I the . exclusion of other bondholders, creditors, and shareholders. We have, however, been assured by the Minister that the legislation will provide that the Crown's prerogative will be abrogated and that the Crown will rank as a creditor of the Corporation pari passu with other creditors of the same class. This is essential before the j bonds can have any hope of command-1 ing the confidence of the investing public."