N.Z. BANKS

Greymouth Evening Star, 1 October 1928, Page 6

N.Z. BANKS

DEFENCE BY MINISTER. WELLINGTON, September 28. Reproof from the Minister lor Finance (the Hon. Mr Downie Stewart) has been administered to the New Zealand Farmers’ Union, because of a rashly-worded resolution which it passed at its last annual conference. The representations of the Union that it considered “that bankers’ privileges have been abused, and that the adoption of British currency would facilitate exchange and trade with the Mother Country,” have caused the Minister to issue a statement on the matter.

“When the resolution speaks of the banks ‘abusing their privileges’ it employs an' unfortunate phrase (says the Minister). It is not, I assume, suggested that the banks have broken the Taw under which they are incorporated. To speak of any commercial institution abusing its privileges when what is meant is exacting the rate of profits justified or enabled by the market is hardly a happy way of putting things. “Whether the banks made ‘undue’ profits is a matter of opinion, and there is no standard of ‘due’ profits to which actual profit, can be applied for comparative purposes. Personally I have always considered the bank rate for internal" exchange as excessive and unjustifiable, and it is open to question whether the annual fee for keeping the pass book, which the banks would in the course of their accounting have to keep in any event, is a fair charge. Apart from these items, T consider the service is good and the charges for accommodation, having regard to risks and other relevant factors, not excessive. I base this view on the following grounds :— “A bank, if well managed, cannot help showing a high percentage rate on its capital, since it relends money deposited, and also creates considerable credit, in the form of notes and overdrafts/the money cost of production of which to itself is negligible. High profit can therefore be made, if the business is large and prudently conducted, without undue charges to customers.

“The banks claim to keep open, for the convenience of the public, a number of non-paying . branches and agencies. How far this is really true I cannot say, but the claim is made and has not been refuted.

“The following is an extract from the latest annual report of the Bank of New Zealand, page 15 - The Chief Auditor has supplied the following figures showing the rate of interest earned by this bank on its interestbearing advances in the Dominion for tlhe years ended Alarcli 31, 1897, 1907, 1914, 1917 and 1927. (The figures for 1928 have not yet been worked out). — 1897 1907' 1914 1917 1927 6.56 5.79 600 6.00 6.67

“.It will be seen that the difference between the highest and lowest point is less than one 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. “I do not think that the figures disclosed above dhow an abnormal or undue rate of profit. “Bank shares are widely diffused in ownership, and are held largely in small parcels by a great number of people. Their profits are very widely diffused among the investing public, and do not go, as is often imagined, to enrich a few bloated capitalists. “The people of New Zealand own one-third of. the capital, in the Bank of New Zealand, t and through the Government-appointed directors have a majority voice in determining its policy. This profit comes to the relief of the taxpayer. Banks pay very heavily in taxation, thus contributing a large sum to the revenues of the Dominion. “In recent times they have had to write off very heavy losses through having extended support to the trade and industry of the Dominion in the recent difficult years. They would require a fair level of average profit in order to build up adequate- reserves to meet losses of this type without' impairing their stability. It is essential in the interests of the community that the banks dhould be sound, and possess adequate reserves to assure the safety of funds entrusted to them, and also allow for contingent loss. Loss is much more common in banking business than is generally realised by the public. “Banks have to attract moneys from the public on deposit against severe competition. They have to meet the competition of the Post Office Savings Bank, and the private savings banks, also the competition of numerous agency firms and investment.'and deposit companies that compete lor the loose capital of the community in ways that are not tolerated in other lands, and that, in my judgment, are a serious menace to the financial stability of the Dominion. These fir-ms are allowed to take deposits, like the banks, but not compelled to keep liquid funds against such deposits. To meet them the bank has to offer- attractive rates for fixed deposits, and this means that since the deposit rate is higher to Hie banks, the advance rate must be higher to the customers ol the banks. “Bank's have a public duty in the regulation ami restriction ol credit, so that over-importation, which is always liable to occur in so spendthrift a country as New Zealand, may be controlled m the public interest. Lnless this is done through making borrowing unattractive by high rates’ of overdraft interest, it. cannot be done at all, and it must be done. What the banks make in higher rates they probably lose in volume of business, so that high rates, as such, are of no advantage io them.

“To sum .up, in my judgment, banks in New Zealand do not abuse their privileges. Banks, here and elsewhere, make large profits, from the verv nature of the business, and they have a hold over economic life that many view with alarm. The only way fo cope with this, should it prove a real menace, would be State expropriation of Hie banking service. This raises Hie issue of the intrusion of politics into finance, and -Hie dangers i>l over-issue of credit, in Hie present ii iilnsl rm-fed state of public and popnlar opinion as regards finance and credit. This e.-iises issues outside the scope (if this opinion, on which I am mil asked directly to advise. Much of H" 1 .-I'.'ilai ion against. Hie banks springs Irmii Ihf pressure of persons who desire adw'iiu'cs without adequate security, and is a plea for inflation and overvaluation of assets that must and should fall in, value.’*