BANKS' EVIDENCE

New Zealand Herald, Volume LXXI, Issue 21744, 8 March 1934, Page 11

BANKS' EVIDENCE

&NSWEKS TO QUESTIONS MONETARY COMMITTEE FACTORS determining rates OVERDRAITS AND DEPOSITS r ß y T ELEGP PIT —OWN CORRESPONDENT] WELLINGTON, Wednesday A comprehensive outline of banking / doHcv in Nevr Zealand was given before lie Parliamentary Monetary Committee to-day by the Associated Banks. In order to giro the banks a lead on the eoninu'rtce's requirements a questionnaire was prepared involving some of the fjalient features of financial policy j n the Dominion and the banks' replies wer e submitted to members of the committee for perusal last evening. The questions toyched on the rate of- interest on. overdrafts and advances, the cheque-using habits of the people, stock »nd station agents, the exchange rate, the factors taken into consideration in the printing of overdrafts, and the declaration of dividends. In all, 21 questions were £,sked, some of which,, together with the answers, are as follows: — ~ Question 1: What determines the j-ate of interest charged and paid by the bunks? Answer: ]Broadly speaking, it ma,y be iiaid that the law of supply and demand determines the interest rates charged and puid by' the banks. A considerable

portion of a bank's profit-earning capac- / jty rents on the margin between their depoisii# ancl their overdraft and discount rates. The necessity for maintaining sin adequate margin has, therefore, li beaiing on the advance and deposit rates. There is no fixed figure which can bo quoted as the actual margin, which varies as between overdrafts yieldirg different rates of interest. Out ol the Margin It may b<( mentioned that the margin between the minimum overdraft rate und the 24 months' fixed deposit rate ' js at present 2 per cent, though the margin is only ll per cent, and even J, per cent in respect of many fixed deposits still current. From the margin between deposits and overdraft rates banks have to make provision for a considerable portion of organisation and running expenses, reserves, depreciation, bad debts and income taxation. After making these provisions the margin left for net profit is extremely narrow. . For taxation purposes it is arbitrarily assumed by the taxation department that lbe income earned by each bank is constantly 30s on each £IOO of the iota] average assets and liabilities of a / bank :for the four quarters of the year, less bad debts actually written off and income on tax-free securities. On the fictitious iincome computed on this arbitrary basis the banks are required to pay income tax: at the maximum rate,, / No allowance is made for the fact that in lean years bank profits represent n much smaller proportion of the total ansetsi and liabilities than in good years. The margin between overdraft and deposit rates is required to furnish income taxation to the extent of 17s 6d for er.ch £IOO of overdrafts, plus each £IOO of deposits, and this fact, of course, must be taken into account whan fixing the minimum overdraft Fixed Deposits N Tho necessity of having a margin between tie overdraft and deposit rates indicates the fact that bank overdrafts ' and discount rates depend to a large extent on the rates paid for fixed deposits. The /rates paid by the banks for fixed deposits depend on the interaction of supply and demand for deposits. Question 2: To what extent has interest on overdrafts and other advances been; reduced, and what proportion of accounts has benefited? Answer: During the past four years minimum rates for overdrafts and.discount? have been decreased as follows: .On November 1, 1931, reduced from 7 per cent to 6J per cent; on September 1, 1952, reduced from 6J per cent to 6 per pent; on May 1, 1933, reduced from 6 per cent to 5 per cent. The present minimum xate is 5 per cent. All account!* have benefited. During the same period fixed deposit rates were :reduced as follows (reductions applied to fresh deposits of all terms from three months to 24 months, but only i;he 2'4 months' rates are quoted here to illustrate the degree of reduction) : On August 1, 1931, reduced from / 5 per cent to 4$ per cent; on June 1, 1932, reduced from par cent to 4 per cent; on December 2, 1932, reduced from 4 per cent to 3£ per cent; on July 11, 1933, reduced from 3J per cent to 3 ]>er cent. The present rate for 24 months' deposits is 3 per cent. Price ol Advances These reductions apply only to deposits taken/subsequently to the dates mentioned,/and customers whose deposits were already current on those dates continued to receive the benefit of those higher rates until their deposits matured. j

Question, 3: To what extent are / variations in interest rates reflected in the rmmb<>r and volume of applica- * tions for advances? Answer: It is a well known economic fact that the tendency of higher rates is toward lessening the number and .volume of applications for advances, and that i;he tendency of lower rates is to increase the number and volume of applications. However, variations in the minimum rates during the past 12 years have,, not exceeded a range of 2 per cent and, with the exception of the recent reduction from 6 per cent to 5 per cent, the alterations have been only in % per cent steps. Other economic factors affecting trading conditions have also come into operation. i Sometimes., contrary to the economic tendency, the -volume of overdrafts has 1 increased after overdraft rates have been increased, and has decreased after the overdraft rates had been decreased. / Limiting Factors

Question 4: What are the limiting /■ factors at the present time in respect of (a) further lowering of interest rates, and (b) further advances for business? Is there any unsatisfied demand for the latter ? Does the amount of//advances depend on the aniou;xt of legal tender held b.y the banks ? Answer: At the present time limiting factorsi are: (a) The obstacles to the reduction of fixed dej>osit rate.*, JjjiineJy, outside competition which binders further appreciable reduction in feed deposit rates; (b) the fact , ■ that there are still fixed deposits re--1 ceiving interest at the rate of 4£ and 4 per cent, though the 24 months 1 rate tow quoted is only 3 per cent. The limiting factor in respect to further advances for business is as follows:—As a result of the heavy fall 1,1 overseas prices for New Zealand's exports, on which this country very large y de pends, and tho consequent impact of the depression on New Zealand, thenar are fewer avenues for the profitable employment of money. The Effect of this is (a) that those who posKous liquid funds refrain from employing them 3 (til that those who pould obtain advances or who could increase t'h'eir advances refrain from doing so. As io whether tliere is any unsatisnea demand for advances for business is a sifnple fact that there is no bank limitation. In fact, the banks are *®ry willing to extend their advance busiir ess, and the reduction of total I rafts is not in accordance with . own wishes. To advance money 0n i'liideqjUate security or unsound

propositions would have the inevitable effect of freezing bank resources and aggravating; thu existing conditions. Question (3: Do stock and station agents com.e into active competition with trading; banks? Answer: To the extent that stock and station agents perform banking functions they may he said to be active competitors". This is involved in the very natuie of stock and station agency bmsinesit, but, as against this, there are certain functions performed by the stock a:id station agents which are outside the scope of ordinary banking practice. To some extent some stock aud station agents obtain financial accommodation from the banks, but they also get their funds from (]) their own shareholders, (2) bv debenture stock, (3) by deposits from customers, There arc examples in New Zealand <if large stock fiims which do not requiirci financial accommodation from their bankers. Exchange Business

Question 7: What proportion of the exchange business of New Zealand is conducted by the trading banks (a) in normal times, and (b) at present? Answer: These particulars are not available to uti. Possibly 80 per cent or more iis dene by the banks, but this is xnßrely conjectural. Under present cixdiauge conditions there is more inducement for importers to endeavour to deal outside the banks. Question 13: In normal times what is the procedure and what are the determining factors ill settling the exchange rsite ? Answer;; Broidly speaking, exchange rates in :aormtd times depend on the supply of and demand for London funds and these exchange rates may bo said to represent the market price at which London funds are bought and sold. If an unbalanced external trading position results ir, a shortage or overaccumulaliion of London funds, it is, of course, necessary to make adjustments to correct the position, because it is obvious that the perpetuation and aggravation of such a position would be to the .detriment both of the banking organisation and of the country in general. Iln. the last analysis goods pay for goodn, and the goods we import must be paid }:or by the goods we export.

Effect of Overseas Borrowing Government borrowing overseas would have the effect of relieving the shortage of London funds,' which might otherwise necessitate an increase in exchange rii.te3. An unfavourable trading position might be coupled with conditions of dmard for bank accommodation, necessitating an increase in overdraft rates.

Subject to tie above remarks, it may be said iiha.t ;in normal times an increase in exchmge rates is an indication that the supply of London funds is less tllian tha demand and that a decrease in exchange rates is an indication that there has been an accumulaticn. of London funds, which cannot bia disposed of at the current exchange irate. Question 20: Are there any specific improvements in New Zealand's monetary policy that can be suggested by the banks as desirable firom the viewpoint of restoring and maintaining general prosperity.

Answer: Prosent conditions in New Zealand are due to world conditions outside i;hei control of this country specifically. They are caused by fall in prices for our produce in the market where that produce is sold, and the banks emphatically consider that prosperity cannot be achieved by monetary manipulations. Abundance ol Money Available As already mentioned, it is not the present banking policy to restrict financial accommodation, and, moreover, tho amount of demand deposits in trading banks and savings banks alone aggregated over J270,000,000 at the end oJ: 19113. The fact that money is available for good investments is shown by the response to Reserve Bank issue anc. by the premium already attaching to Reserve Bank shares. The remarks of the cha.irman of Barclay's Bank, I<ondon, in the course of his address at the recent annual meeting of that batik, should be of interest in this connection. He siaid: "It is a matter for congratulation that we are upon a sound financial basis, and that, largely owing to the wisdom of the Chancellor of the Exchequer, wild and unsound schemes proposei for currency and credit manipulations designed to secure a quick return to prosperity have beon disposed of. We should realise that only by constant, patient and faithful adherence to sound principles can the credit of the country be maintain k1 at its present high level in the eyes of the world, and that by these means alone can we hojie to lead 'the world to eventual recovery." Clause ol Depression Follow ng; on the presentation of the statement of tho Associated Banks, Mr. E. C. Fussell, on behalf of the banks, made a statement embodying ' the opinion that the present economic situation was not due to any fault in the banking system, but to more deepseated causes. The moinetary system was simply a reflex of existing economic conditions., He did not think that normality could be restored: by monetary measures. The matter arose in the course of the examination of the banks' representative by the committee. Mr. Fussell was oxamined at length by members of the committee, principally Messrs. EL M. Rushwoirth, M.P., F. Lye, M.P,, aid B. C. Ashwin, of the Treasury, and Dr. W. B. Sutch,

The hearing; will be continued tomorrow.