RATE ON ADVANCES

Evening Star, Issue 19893, 15 June 1928, Page 13

RATE ON ADVANCES

A BANKER'S DEFENCE | INTENSE COMPETITION FOR DEPOSITS RAPID FLUCTUATIONS UNDESIRABLE. lu the course of his address at the animal meeting of the Bank of New Zealand at Wellington to-day. the chairman (Sir George Elliot) referred at some length to the much-debated rate of interest on advances. "Banks were much criticised (he said) wher the minimum rate of interest on advances was increased in May of last year—an action rendered necessary by the position into_ which the banks were getting. It is true that the advances of all the banks in New Zealand had increased considerably; it is also true that the imports for the years ended March 31, 1926 and 1927, wore much in excess of exports; but neither of these factors, important as they are from a banker's point of view, was the chief reason why the overdraft rate was raised. The determining cause was the intense competition, Governmental and private, tor deposits. This competition had seriously affected the position of banks, which wore reluctantly compelled to raise the deposit rate, not only in order to hold the deposits they already had, but also to stimulate and encourage a fresh supply, and so attain a proper and adequate adjustment of deposits in relation to advance*;. The natural sequence to a rise in the deposit rate is a rise in the advance rate—this, of course, in the pursuit of that perfect balance so much desired, but never attained by bankers. "Perhaps in no country in the world is the taking of deposits, either at call or for extended periods by limited companies and private firms, carried to such an extent as it is in New Zealand. Many of these concerns conduct what is to all intents and purposes a banking business without being compelled by law, as banks are, to keep liquid reserves against their deposits. This state of affairs, apart altogether from the danger it introduces to borrower and lender. alike, somehat upsets-the banking position. It will bo readily admitted that banks carry on a highly important function in the community; so woven are they into the woof and warp of a nation's life that anything that affects them affects every member, of that nation, directly or indirectly. It seems, therefore, to mo of the utmost importance that banks and Governments should be in the closest relationship ono with the other; and more especially is this true of the Government of New Zealand and the Bank of New Zealand, becauso the Government owns one-third of the capital of the bank.

" Tho position just about the time rates were raised a year ago was as follows:—Advances by all the banks trading in New Zealand amounted to £50,801,000, while deposits, free and fixed, amounted to £45,529,000. The position when the figures were last published was:—Advances, £46,070,000; deposits, £49,958,000. It will bo seen that in one year the banking position of the dominion has improved by £9,160,000. “During the past few months there has been much agitation for a reduction of the bank advance rates, and, in view of the figures I have quoted, there would appeal to be some justification for this agitation. I would point out, however, that to lower rates before the position becomes stabilised’ might eventually be more upsetting than to keep them for a little longer at the level ruling at present. If, as a result of such lowering, the demand for advances increased unduly, or deposits were reduced, tho same position as existed a year ago would quickly develop, and tho same remedy would again require to bo applied. Rapid fluctuation in bank rates is not a desirable state of affairs for any country, and it is to avoid such a contingency that the present rates are being maintained somewhat longer tbjn some people think nece=«nrv

“The banks are necessarily in the best position to know what the actual present economic and financial position is, and what its future is likely to be; they would bo false to their trust if, against their better judgment, they allowed themselves to be stampeded into doing something that would not, in their opinion and with their knowledge. be in the best interest of all concerned. May I emphasise the fact that high rates of interest are not of advantage to (ho banks: borrowing customers may rest assured that their bank directors will be just as pleased as they themselves when Iho position warrants a reduction. The world is slowly—very slowly—returning to normal conditions, and unless something unforeseen happens it looks as if interest rates everywhere will have a downward tendency in the near future. Heavy taxation rendered necessary by Iho war is one of the principal factors in retarding a. fall; reduction of taxation would help much towards a more desirable state of things. With the outstanding exception of the United States, which as a result of the sudden highly lucrative trade that developed during the war, has become the greatest creditor nation, it would ho to the advantage of almost every country if a permanent '•eduction of interest rates were brought about, not only because of the benefit that would accrue in connection with their public debts, but for tho aid cheap money would give to their industrial and agricultural activities. “The Chief Auditor lias -i.pplicd the following figures showing tho into of interest earned by this bank m its in-terest-bearing advances in the (iemiriion for the years ended March Ml. 1F97, 1007. 1914. 1017. 1927 (The figures for 1928 have not. yet been worked out.) These are:—lß97, (3.59; 1907, 5 79; 1914, 6.00; 1917. 6.00; 1927. 6.67

“ it will bo seen that the difference between tbe highest and lowest point is less than 1 per cent. Remembering the heavy increase in income tax, salaries, and other overhead expenses of the bank between 1907 and 1927, one may recognise that the bank has not passed on to its borrowing customers a proportionate share of its increased operating charges. The desirability of cheap money must indeed be emphasised; but in New Zealand at least it is not the pan , '' , en for rll 1 ills that many wrietrs and public speakers endeavour to make out. In London tbe raising of the bank rate has no doubt a decidedly depressing influence, for while the world may be on a dollar basis, as the Right Hon. Mr M'Kenna. chairman of directors of the Midland Bank, pointed out at the last annual meeting of Ins shareholders, London is still a great, if not the greatest, financial centre, and a rise in interest rates is of vital importance to the great financial and bill broking houses there —whose huge operations covo - the trade of the world—many of which houses work on a margin of an eighth; or even a sixteenth, of 1 per cent.; hut a rise in interest rates has no such devastating effect on a country like New Zealand. It may be inconvenient," but'it is not- vital. After an investigation into the individual losses made by the bank during the year, I am satisfied that by no stretch of imagination could these losses in any single instance be attributed to the payment by the borrower of high interest charges. I will go further and say that, had such

brorrowers paid 4 per cent, for their financial accommodation instead of 7, the result : in every case would have been the same. It. may have been one of the subsidiary of a man’s financial downfall,-but it was not the primary cause. The primary cause may have neen a heavy fall in land values, a drop in tho price of stock, over-speculation on the eve of a falling market, an unforeseen change of conditions, or the acquisition of a greater area of land than was warranted by the owner’s capital.”,;