Parliament's Finance and Expenditure Committee has decided not to hold an inquiry into banks, their profit margins and interest rates, the NZ Herald has reported. Committee Chairman and National MP Craig Foss told the Herald the committee had voted against an inquiry into "recent banking practices including a particular focus on retail interest-rate margins". Labour Party finance spokesman Cunliffe said he favoured a broader inquiry covering margins on medium-term rates and credit-card borrowing as well as short-term rates.
However, on being informed by the Reserve Bank that it was reasonably happy with the medium-term picture, Labour's position was that it would have been satisfied with a narrower inquiry. That was an approach Government members had given "every indication" of supporting. "Not only does that mean there will be no further action on it from the committee, but it also in my view calls into question the integrity of the process. "We went through an exploration, the prima facie case was established by the Reserve Bank, and Government members voted against it anyway. "Thousands of New Zealand homeowners, businesses, farmers and exporters have every reason to ask why Parliament's watchdog on the economy is, by a majority vote, choosing to stay muzzled," Cunliffe said. Federated Farmers' economics and commerce spokesman, Philip York, said his organisation had also gained the impression there was cross-party support for an inquiry and was now disappointed with the committee's decision. Foss said yesterday's decision was made following "various briefings", including additional presentations from the Reserve Bank. "I think the committee has a lot more information at hand to reach the conclusion by majority that it did today, but I'm sure all members will be looking forward to the next Financial Stability Report and the next Monetary Policy Statement from the RBNZ." Foss also echoed Prime Minister John Key's comments last month that an inquiry was of limited value. "At the end of the day an inquiry could only ever inquire. Could it affect and impact on actual interest rates or effect change? Obviously it can't."
My view below
I've looked into these issues in detail and have written these previous pieces here on why Parliament's attack on the banks was wrong on 8 counts and an initial article on the committee's report. Westpac's economists have also published an extensive research note on this issue here. I think the committee was wrong to suggest banks are profiteering by not passing on the last OCR cut. The banks' own figures show their profits are falling because they're having to compete harder for local term deposits and their foreign funding costs are up. But I think the banks can be criticised in a couple of areas. They are being much more conservative in their lending to businesses then to farmers and households. They appear to be subsidising cheap mortgage rates with higher overdraft rates for businesses and very high credit card rates. They would argue the risks are higher, but if that were true they would have shut down new lending to farmers completely. Instead they are piling even more bad money after good into the rural sector. I think the committee was right in the end not to launch a full inquiry. It would have told them what I and Westpac have already said. But I am curious about the Reserve Bank's behind the scenes role here. Bollard was grumpy in public with the banks, but appears to have backed off behind the scenes, apparently reassuring the committee he was 'comfortable' over the medium term. I'm still waiting for the Reserve Bank to provide the details Bollard referred to in his FEC hearing about bank margins rising substantially. I have made an OIA request. I'd also love to know what the RBNZ told the committee in its "additional presentations." It's convenient for everyone to kick the banks, but if they don't follow up with new rules and leashes then there's a risk they are seen to be crying wolf. One day the FEC will probably need to hold an inquiry. Let's hope they make the right noises first next time. I think the Reserve Bank needs to be careful it doesn't make itself look impotent by talking tough and then not being able to or wanting to follow through in public. Actually, the Reserve Bank announced on Tuesday a new prudential liquidity policy that will have the effect of restricting the banks from going on another borrowing spree offshore to fund new mortgage lending here. That is a real leash, but it got virtually no publicity in the mainstream media. The Reserve Bank is actually being tough with this leash. The problem for the Reserve Bank is this leash may actually have the effect of putting up mortgage rates slightly. That wasn't what the politicians would have wanted any leash to do. New Zealand's basic problem is that interest rates are too low, both for depositers and borrowers. Margins are not the problem. Your view? We welcome your views in the comments below.