Prime Minister John Key revealed at yesterday's post-cabinet press conference that the idea of a joint bank-government co-investment fund for business investment had been abandoned because the banks had ditched the idea formed at the Jobs Summit. "It's my understanding that the banks pulled the pin on that," Key was reported as saying in the press conference. Key said the Government had been committed to the fund "if the banks had been willing", but they had not. "My understanding is that because it was equity not debt, it had implications for their Tier One capital," Key was reported as saying. He was referring to the 'most valuable' form of capital used by the Reserve Bank to judge a bank's soundness. However, blame for the failure of the co-investment fund idea is already being parcelled around. Adam Bennett at NZHerald.co.nz reported "the banks were effectively let off the hook by the Government because the Treasury, which administers the Government's wholesale and retail funding guarantees for the banks, got cold feet over the equity investment scheme."
A well-placed banking industry source said the banks have backed off from the proposal largely at the Government's wish. "There were, subsequent to the summit, some meetings between Treasury and the banks. Ministers came to indicate through Treasury that they weren't that fussy about the banks participating because it was likely to have an effect on Tier One capital." The source said the banks' view was that Government had "pulled the plug" on their participation for that reason.
What I think I don't want to get into the blame game until I've had a few more chats with people inside the industry. However, Adam Bennett is well connected and I reckon his version is the most accurate one.
If so, it's a bit surprising John Key has chosen to blame the banks on this. The fairest thing to say is that our banks appear not to be able to, or don't want to, put up NZ$1 billion of equity into the fund. I also suspect Treasury and the Reserve Bank were lukewarm on this because they knew it would stretch the banks a bit at a time when they least need stretching. This is potentially the most disturbing aspect of this. The suggestion is that the banks can't afford to stump up NZ$1 billion of equity and the banking regulator knows it. NZ$1 billion is a lot of money to you or me and it's (surprisingly) a lot of money to the banks. The banks (the big 4 plus Kiwibank) collectively had assets worth NZ$339.714 billion at the end of December, yet they had just NZ$21.706 billion of equity, implying a leverage ratio of 15 times equity. A NZ$1 billion committment of equity (rather than just another loan) at a time when banks are being very careful with their precious capital is a big one. It would represent a near 5% increase in their equity 'commitment' to New Zealand business. They could, in theory, lend an extra NZ$15 billion on that extra amount of equity capital. Perhaps that is what they should do rather than invest NZ$1 billion in stakes in businesses. The co-investment fund idea was also problematic from a cultural point of view. Banks in New Zealand, unlike in say Germany or Japan, don't like to put their own money into equity in companies. It's a different set of skills to lending money. The risk levels are higher. Our banks just don't like doing it and they tend to fail when they do it on any large scale. ASB's disaster with BBQ Factory comes to mind. I suspect this was a good idea that has failed to get through a robust testing process. Now is the time for us all to stick to our knitting and do the basics right. Banks should lend to good businesses through good and bad times. Governments should focus on running public services and providing a safety net. Consumers and businesses should focus on reducing their debts to get through a global de-leveraging process and a long global recession that has only just begun. Your view? Comments below please.