BANK DEPOSIT RATES

Evening Post, Volume CXXI, Issue 88, 14 April 1936, Page 12

BANK DEPOSIT RATES

WHY THEY WERE RAISED

POSITION IN AUSTRALIA

"Evening Post," April 14. Light was thrown by Mr. A. C. Davidson, general manager of the Bank of New South Wales, on the subject of the recent advance in the rates to be paid by banks of the Commonwealth on fixed deposits. For record purposes it may be stated that the uniform rates on fixed deposits as from March 24 are as follows:— New Rates. Old Rates. Term. P-c- P-£----3 months 2 H . 6 months ..... 2| -^ ■12 months f i"± 24 months 3 »i ■■ The Commonwealth Bank rates were: _ 3 months, 1 per cent.; 6 months, 11 per cent.; 12 months, 2* per cent.; 24 months, 21 per cent, These new rates will be paid tor new deposits or renewals of present deThf Commonwealth Bank, which formerly was not a serious competitor with the trading banks for three and six months1 deposits is now offering the same rates as the trading banks.. All other financial institutions which accept deposits from the public will now have to review their position with a view to-ensuring a flow of funds to them. Bank overdraft rates will increase when the higher deposit rates become effective. A STEP IN ADVANCE. .Immediately- the Commonwealth Bank made its recent open-market issue of £1,000,000 in Treasury bills— of which £315,000 were subscribed by the public—the Bank of New South Wales announced its decision to rai?e the rate of interest on new sums to be placed with it for the usual terms. "I am as desirous as the Commonwealth Bank," said Mr. Davidson, 'to maintain interest rates at a low level, believing that recovery has not proceeded far enough to warrant general retardation of lending by raising interest rates. My recent action in quoting higher deposit rates did not mark a change in my view. Reluctantly i followed the lead to higher rates given by the Commonwealth Bank. _ "My attitude to interest rates is well known, as I have on many occasions stated that an essential factor in recovery is the stimulation of employment and private enterprise by a plentiful supply of cheap money ,"I have striven to maintain interest rates at a low level, sometimes in face of strong opposition. When last year the banks noticed their deposits ana cash reserves sharply diminishing I resisted the attempt to raise deposit rates. As far back as September, 193 d, some financial leaders were advocating that deposit rates should be raised. THE WANT OF A LEAD. "I held then that effective action could be taken by the Commonwealth Bank to maintain interest rates at their present level. That is still my opinion. In January, 1933, in a public statement, I said: 'Speaking on behalf of my own bank, but-voicing, I am sure, sentiments which are shared very widely, I shall be happy to follow a lead from the Commonwealth Bank in further action to reduce interest rates along sound lines.' From that attitude I have not changed. ' "But before I can follow I must be sure that I know in which direction the Central Bank is leading. The statement published does not help to a clear understanding. I regret, therefore, to say that until I know more clearly the policy the Commonwealth Bank intends to pursue, it js somewhat difficult for me to revert to the old rates of interest. The decision to withdraw from the sale of Treasury bills is by itself not a sufficient cause for me to reverse my decision. When I decided on this step I believed,l was acting in conformity with the policy of the Central Bank, and I was sorry to learn later that the Commonwealth Bank Board took a different view. • • • ~ "I have already indicated the importance of low interest rates as a recovery measure, but it must be obvious that it is hardly possible for money to remain cheap while lending is being restricted. Restriction of advances and low interest are incompatible. When the Commonwealth Bank takes action appropriate to low interest rates, _ the trading banks naturally, and m their own interests, will follow its lead. SEASONAL IMPROVEMENT. Giving evidence before the Banking Commission in Sydney Mr. Davidson said it had been expected that the first quarter of this year would bring the usual seasonal improvement of all traiding banks. "On the whole, the improvement has been slight," he said. "The prospects, therefore, with the passing of the export season are not bright for the restoration of cash resources. The most sanguine estimates of the 1935-36 balance of payments suggest there will foe a small deficit—this despite an export season in which the value of exports has been considerably increased. "What is, needed to restore trading bank cash reserves, in the absence of Commonwealth Bank action, directed energetically towards their replenishment, is a substantial increase in the balance of payments." The Commonwealth Bank having indicated it had no such intention, added Mr. Davidson, the trading banks had no alternative but to exercise increasing vigilance in the making of advances, leading to the curtailment of lending. THE CARDINAL PRINCIPLE. Explaining the bank's credit policy, Mr. Davidson said the fact that. the bank increased its advances by £12,000,000 in the eighteen months from March 25, 1929, to September 29, 1930, while its deposits fell by £.4,000,000 showed how it had sustained Australian economy during the depression. Its policy of non-foreclosure was well illustrated in Western Australia, where the position of the bank's wheat customers was very serious. Despite the complete disappearance of the equity of many borrowers, there was only one foreclosure in the three worst years of the depression. Throughout the whole period the bank did all in its power to maintain consumers' income at as high a level as possible. "This was the cardinal principle guiding it in all its actions," said Mr.

Davidson. "It accounts for the bank's persistent efforts to stimulate recovery by providing a plentiful supply of cheap money." Mr. Davidson was asked: "Do you consider Australia is over-banked?" He replied: "No. The banking system here is much stronger and much more flexible than in the United States."