RATES ON OVERDRAFT

New Zealand Herald, Volume LXXI, Issue 21906, 15 September 1934, Page 16

RATES ON OVERDRAFT

SUGGESTED REDUCTION RESERVE BANK OPERATIONS SHORT-TERM MONEY MARKET [BY TELEGRAPH SPECIAL REPORTER] WELLINGTON, Friday "The Reserve Bank will be placed in a strong position from the outset if it takes over from the Government the accumulation of sterling assets in London," states the Monetary Committee's report. "It is understood that it is the intention of the Government to dispose of the funds in this way and utilise the New Zealand credits obtained in exchange to pay off Treasury bills originally issued in payment for the sterling assets. "These operations will lighten the interest burden on the State, and therefore benefit the whole community. It will so increase the sterling reserve of the Reserve Bank if necessary or desirable, the volume of credit in New Zealand can be considerably increased. In fact, paying off the large amount of Treasury bills outstanding will in itself supply the trading banks with ample resources on which to base an enlarged credit structure. However, the present volume of credit appears to be ample, and what is required is a means of inducing people to make greater use of tho resources available." Lowering Interest Rates The normal method of doing this, continues the report, is to lower bank rates of interest. With idle funds accumulating in the Dominion, longterm lending rates have declined sharply in recent months. Owing, probably, to the fact that there is no organised short-term loan market in New Zealand, short-term rates have not fallen in anything like the same ratio, but the transfer of a large amount from London, by the Government, would give considerable impetus to the movement. "In any case," states the report, "we consider a further substantial reduction in bank overdraft rates is essential. The committee considers that in prei-ent circumstances the overdraft rate for first-class accounts should be reduced to 3£ per cent, with a maximum of 5 per cent for other accounts." "The existence of a short-term money market would greatly facilitate open market operations. In England, the United States, and in many other countries, there exists a market for short-term Government securities, trade bills, promissory notes, and loans at call. These are regularly bought and sold by banks, brokers, insurance companies and merchants, and olfer for them an outlet for Burplus funds in need of temporary investment. This is a great convenience to the commercial world, *which can function mor<» efficiently and on smaller margins if this short-term money market exists. From this standpoint alone, every attempt should be made to develop such a market in New Zealand. Such a market can only bo organised -and built up gradually over a long period." Long-dated Securities "In the meantime the only class of securities readily obtainable in appreciable amounts is Government longterm securities. The Reserve Bank's power to buy Government securities was limited by the Reserve Bank of New Zealand Act. If the bank desires to invest its capital and reserves in long-dated securities it will mean that during the first four years the bank, for the purpose of open-market operations, will be in a position to buy an additional £1,500,000 of long-term Government securities, but at the end of tho period of four years any additional securities held will have to be disposed of and the bank will be powerless to undertake open-market operations. "The object of the restriction in the Act is to obviate any possibility of the bank's funds becoming.tied up in longdated investments, but, while this is desirable, it is equally desirable, and, in fact, essential, that the bank should have the power to undertake open? market operations at any time for the purpose of directly influencing the credit position. This being so, it is considered that tho bank should be empowered to buy long-term Government securities up to, say, three times the amount of its paid-up capital and reserves. This would allow up to £3,000,000 for open-market operations. It is recommended that the Act be amended accordingly. "The operations of the Reserve Bank would be facilitated," continues the re* port, "if more use were made of bills of exchange and promissory notes in internal trade. Furthermore, the use of negotiable documents instead of bank advances should cheapen the cost of credit for trading operations." TRADING INSTITUTIONS OPERATIONS AS BANKS SOME CONTROL SUGGESTED [BY TELEGRAPH—SPECIAL REPORTER! WELLINGTON. Friday A number of stock and station agents and other institutions not generally recognised as banks make a practice of taking deposits withdrawable by cheque or equivalent order, states the Monetary Committee's report. It is understood that some of these institutions also do exchange business. Such institutions are carrying on banking business in direct competition with the trading banks without any of the safeguards or restrictions imposed upon the latter. "If the Reserve Bank is to carry out its functions successfully," says the report, "it must have full information in regard to, and the same measure of control over, the banking operations of all institutions. Furthermore, in the interests of depositors and financial stability generally, it is desirable that such institutions should disclose their financial position and contribute to the pool of liquid resources held by the Reserve Bank in support of the banking system generally. In time of trouble the Reserve Bank would probably have to 'come to the assistance of any such institution, and for that reason alone it should have full knowledge of its operations. "It is realised that stock and station agents in particular specialise in financing farmers, and do classes of business that would not be undertaken by the banks. In addition, these firms buy and sell stock, handle produce, and do a general business quite apart from theif banking activities. This difficulty could be overcome, however, by segregating the banking business if it is to be continued, and dealing with it separately. It may bo added that it would not seriously prejudice the business of financing farmers if the provision for the issue of cheques or orders was discontinued, and this perhaps tvould be the best solution." For the quarter ended March 31, 1934, 603 trading companies held deposits amounting to £5,988,116. These companies included stock and station agents. The most unsatisfactory feature was that £3,292,740, or nearly twothirds of the total, represented deposits at call. As tho majority of the firms used the funds for trading purposes, and did not hold liquid resources, the position was far from being a sound one. In fact, it might at any time constitute a danger to the stability of the monetary system.