English fires shot across banks' bows

Finance Minister Bill English quietly warns banks not to further widen their profit margins by increasing mortgage rates more than OCR

10th Nov 11, 4:42pm by Bernard Hickey

By Bernard Hickey

Finance Minister Bill English has quietly warned New Zealand's banks not to put up their mortgage rates by more than any increase in the Reserve Bank's Official Cash Rate, saying their profits are already strong and don't need further strengthening.

"Their interest margins are looking pretty healthy right now. I think there's a bit of slack there," English told Interest.co.nz in a Double Shot Interview (above) when asked what he would say to the banks if they increased mortgage rates by more than any OCR change, or increased them without an OCR hike.

BNZ CEO Andrew Thorburn raised the prospect last month of a decoupling of floating mortgage rates and the OCR in New Zealand because of higher funding costs. See Gareth Vaughan's October 28 article here.

All four big banks have reported strong profits and higher net interest margins this year, despite regular talk of higher funding costs because of financial turmoil in Europe. See Gareth Vaughan's opinion piece here.

Elsewhere, English backed the Reserve Bank's plan for Open Bank Resolution, which is aimed at reducing the government's exposure to any bailouts of banks in the event of global financial crisis.

"The Open Bank Resolution policy is designed to maintain a bank, but ensure that it's the owners and bondholders who take the haircut rather than the taxpayer," English said, adding that there remained discussion on whether term depositors would also take 'haircuts' or losses in the event of a bank collapse.

"The general principle here is quite important. We're much better to have a banking system that's strong to start with, but then knows it faces the consequences of the risks that it takes," English said.

"By the middle of next year we'll be unique in the developed world in having no formal guarantees in place, and by then we'll have the Open Bank Resolution policy in place, which reduces the prospect that taxpayers will be underwriting risks taken by bankers and that's a pretty unpopular policy around the world."

This article was first published in our email for paid subscribers this morning. See here for more details and to subscribe.

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

37 Comments

by Vanderlei Luxemburgo | 10th Nov 11, 5:06pm 1320897960

Bill English proving himself to be the people's hero by telling the Banks that its ok to hoover a billion bucks a year out of a struggling economy, but any more than that would be a step too far!

My hero

by Ralph | 10th Nov 11, 5:14pm 1320898480

So long as he takes away tax payer guarantees I'm pretty happy.

by Lucky Basket | 10th Nov 11, 5:46pm 1320900408

Let me guess : You have no savings and lots of debt. You probably have mortgages on a pile of creaky renters that you paid a fortune for and so you hope the banks crash down so you can walk away scot free while savers suffer for you.

No after some reading it looks like maybe you are a farmer who owes a ton of money and so would love to see your bank go belly up so you can walk away whistling a merry tune with a big smile on your face.

by Ralph | 10th Nov 11, 6:28pm 1320902922

Poor guessing. None of the above.

I just don't see why tax payers should guarantee the finance industry in particular. They should suffer the consequences of their risk taking like the every other business.

by Justice | 10th Nov 11, 6:43pm 1320903806

What do you think Kiwisaver is? It's a financial system subsidy. As a rule people are forced to use banks either for access to wages, or mortgages or general savings by............GOVERNMENT. That's why the government promotes a society based on using debt and making banks rich. To not have a GGS at that very moment the global financial system collapses ( and it will, IS) then I would run for the hills mate cause you will see violence that will make Argentina's collapse look like a comedy act.

Only one thing wrong with the NZ GGS? it included financial institutions that are NOT banks.

by Ralph | 10th Nov 11, 7:04pm 1320905098

Think of it this way.

If there is a collapse of the kind you fear the likelihood that tax payers (government) will be able to guarantee all the deposits of all the um., tax payers... is zero.

by Rob | 11th Nov 11, 1:47pm 1320972463

Thats rubbish. There will be someone willing to lend to the government if they needed money. Lots of money in china waiting to find a home.

I think we do need a government guarantee, as other countries have them, but it should only cover banks. The only reason why it has got a bad name in NZ is becuase there was a flaw with the old system, wher it covered finance companies, and many people took advatage of this and invested their money in thesre finance companies that were offering huge rates of return. I was like watching a slow car crash, as at some stage they were going to fail, leaving the tax payer to pick up the bill.

Noone in NZ should ever lose money by having it stored in the bank, especially with such poor deposit rates, that aren't even covering inflation. Otherwisre you are better to have your money stored in a safe or under your matress, or better yet, spend it. If a bank does fail, and people do lose money, it will undermine the whole 'save' message.

by Anne | 10th Nov 11, 5:36pm 1320899760

Quote:

"...English said, adding that there remained discussion on whether term depositors would also take 'haircuts' or losses in the event of a bank collapse ".......

That's what I like (not), real inspiration to try and save towards the future........ .......the interest rates are pathetic and with a non-compensationary tax rate against inflation is he now trying to discourage saving?

Might as well withdraw what I have and stuff it in the mattress if the banks are in effect going to steal it.

by Nicholas Arrand | 10th Nov 11, 5:38pm 1320899924

Don't fret, Anne. There's no way an Aussie bank would allow it's New Zealand subsidiary to go down. It would be too damaging to its international brand image, and the wider Australian economy, to allow what would be small change to them to support, to risk the funding costs/strike that would occur if they did. At worst, there'd be a forced marger between the bank in trouble and another Aussie bank.

by Lucky Basket | 10th Nov 11, 5:40pm 1320900014

Billy and his crowd are all heavy into property investments so naturally they want to shore up the property market and that means deterring saving.

by Kate | 10th Nov 11, 5:50pm 1320900600

There really is only one way to go and that's to get your deposits out.

by cowhsit | 11th Nov 11, 9:01am 1320955310

so in 6 months time....

`Anna darling was that mound I was caressing in bed last night your money honey?'

by MortgageBelt | 10th Nov 11, 6:19pm 1320902361

Only one way for interest rates to go ..... and that's DOWN .....

NZIER Economist Shamubeel Eaqub predicting that NZ Reserve Bank will be cutting the OCR over the next 6 months - as a needed response to global situation.

by Kate | 10th Nov 11, 6:38pm 1320903480

Doesn't matter a toss what the Reserve Bank does - the bank's have a new buzz word: "decoupling".

by MortgageBelt | 10th Nov 11, 6:48pm 1320904103

Yes, clever that one. Let's add another 100 basis points to cover potential risk & increased offshore borrowing(that may happen in a year or so).

by Kate | 10th Nov 11, 6:56pm 1320904583

My understanding was that most of the majors have significant refinancing to do in January ( I think it was on TV1 news?).

by Wolly | 10th Nov 11, 6:29pm 1320902940

That settles that. To hell with putting savings into the banks this side of the ditch. So easy now to move the loot across the Tasman to have the govt guarantee over there. The OBR is a stupid idea. All it does is increase the risk.

by Wolly | 10th Nov 11, 6:49pm 1320904142

You miss by a mile ctnz...the guarantee over a pretty big amount of savings is a fact across the ditch in the very same banks..and the rates are a good 1% higher at present...and the aussie economy, although facing a heap of crap from a Chinese slowdown, is stronger than this one. Now if you want to risk the 'haircuts' English refers to...then you go ahead and park your capital this side of the ditch. Along with a haircut to your term deposit, you would have to ask a pointy head "how much may I have of my own money this week please sir"......Frankly, the OBR is a very stupid idea and as capital departs for aus, pressure will force the fools to dump it.

A govt guarantee over up to $100,000 would remove risk of the capital flight.

by Anarkist | 10th Nov 11, 8:26pm 1320909966

Why don't you stand for parliament then Hugh? I might even vote for you just because you'd be willing to stand up for your convictions in the eyes of the public. I'd give the politicians that at least, because rather than pontificating from the sidelines about what somebody else should do to change things, they're willing to be subjected to judgement and criticism for their mistakes. They may be wrong more often than not, but at least they're willing to face up publicly for their failures as well as successes, which is more than most are willing to do.

by Colin Riden | 10th Nov 11, 9:37pm 1320914226

IS GOVERNMENT REALLY TELLING PEOPLE CLEARLY WHAT NEEDS TO BE DONE???

The problem with your question Hugh is that you didn't specify for whom whatever needs to be done. That leads to a range of very different answers - a couple being:

In terms of what needs to be done for N.Z. Bill doesn't appear to understand the real nature of the problem, or his part in defending the status quo. He is not alone in that - it is a reflection of the circles he moves in.

In terms of what needs to be done to get the National party re-elected, Bill has been well schooled, has his side step close to perfect, and is staying on message.

by Basel Brush III | 10th Nov 11, 7:35pm 1320906923

Did I read that right?

What have mortgage rates changes got to do with the OCR anyway?

I keep reading here and elsewhere that there are many greater influences on bank funding costs than the OCR, so how BE intends to measure his ultimatum is beyond me and I suspect beyond most of us.

OK it is a new ballgame after the Election when the punters are given another three years to forget the nasty post Election actions.

by Colin Riden | 10th Nov 11, 8:27pm 1320910031

As for English's statement the OBR will see the bank owners and bondholders pay, he had better read the RBNZ Sept 2011 bulletin including easy to comprehend charts and adjust what he is saying on camera or he might be accused of lying;

"Secured creditors include those with a legal priority over the bank’s assets. The OBR process should have no impact on the ranking of creditors. Secured creditors would look to their security in the first instance to meet their claims on the bank. "

http://rbnz.govt.nz/research/bulletin/2007_2011/2011sep74_3hoskinwoolford.pdf

Thanks Ian. Your understanding of the OBR is the same as mine. So why would Bill be spinning a very different interpretation?

I suppose we should give him a little time to correct his 'misleading' statement, or come to the obvious conclusion.

by scarfie | 10th Nov 11, 8:26pm 1320910002

That is an intriquing letter from the Harvard Studends there Iain, I have posted that on my facebook page along with this comment.

"At least some people are smart enough to work out there are flaws in the current model, just a shame it has taken five years what what are supposedly the brightest to figure that out."

by Kate | 10th Nov 11, 9:02pm 1320912121

Yes, Iain, thanks for the link to the Harvard student walk out. Fascinaing - and there is a further blog titled 'In defense of Ec 10' - also worth a read.

http://hpronline.org/campus/in-defense-of-ec-10/

Good on the students - although they didn't express very specifically what they perceived as the bias in the course material, having read the 'in defense of...' summary of what the content is - I imagine they were frustrated with the status quo orthodoxy, even if they didn't know that's what it was that offended them.

Point is - all around them soveriegn states are falling apart - criminal acts of the financial sector go uncharged by the law of the land... no doubt this professor failed to admit modern economics/economists had a part to play in that. And for that alone - the students were right to walk out.

To add insult to injury, they were given a Greenspan article to read - what academic in their right mind would think that particular failed economist could have anything to say that was "instructive"!

The 'In defense of Ec10' blog/letter writer makes an interesting statement;

Economics is not philosophy, and the primary goal of Ec 10 is not to teach students how to make the world a fair place.

In this regard, he couldn't be more wrong - economics was born out of the moral philosophers of the Enlightenment era and indeed the entire purpose was to provide a moral theoretical basis on which to make the world a better place! Economics "lost it" when it strayed from this philosophical path and "mathemetised" - a sort of cross over into the quantitative model - attempting to emulate the natural sciences.

As a field of study I suspect it does more harm than good unless those that teach it are prepared to disuss moral philosophy as well.

by Kate | 10th Nov 11, 9:50pm 1320915041

And here's a great further blog post: Defending the Walkout

http://hpronline.org/campus/in-defence-of-the-students-who-walked-out/comment-page-1/#comment-24200

by steven | 11th Nov 11, 7:10am 1320948638

Paul Krugman has long commented on the salt water v frsh water school and that some schools in partiular simply ignore all other economics models/theories except for one.....this piece does a good job or nailing yet another nail in the coffin of neo-classical economics....

And Steve Keen lobs in a handfull,

"I applaud them for this move. Mankiw’s various economics texts are among the most simplistic of the many neoclassical textbooks that parade this flawed paradigm as a flawless jewel of human reasoning. I’m delighted that his students have taken the rebellion against this paradigm to one of its key promulgators."

The short form should be the students should move to an economics school of better standing....Im glad they are at least thinking....as they should be for under-grads.....

regards

by KW John | 10th Nov 11, 10:52pm 1320918720

Steve Keen joins in

And more critically...

by Stephen Hulme | 11th Nov 11, 12:06pm 1320966390

@ English "The Open Bank Resolution policy is designed to maintain a bank, but ensure that it's the owners and bondholders who take the haircut rather than the taxpayer," English said, adding that there remained discussion on whether term depositors would also take 'haircuts' or losses in the event of a bank collapse. "

Big Banks Plead with Customers Not to Move Their Money

I wonder if word has reached Bill English, that the difference between panic and confidence is thin. I know younger (my son's friends) depositors are already utilising what they perceive to be the benefits of NZ cooperative credit unions.

by Gummy Bear Hero | 11th Nov 11, 1:24pm 1320971097

Is Wild Bill having a shot across the banks bow , 'cos he wants to bump-off John Key whilst he's having a cup of tea ?

..... go Banksy , the true-blue " struggle street " Epsom boy from Australia .

You Epsom voters are being played 'like the only pack of condoms in a brothel ....... gonna do something about it , .. or roll over and get stuffed & screwed ?

by mae | 11th Nov 11, 4:39pm 1320982760

Can someone give me some more background as to why the government feels it necessary to implement the OBR at this particular juncture? Whilst accountability is a good thing re banks, I'm not sure why they are taking this particular tack now.

Was there any bailout of the NZ banks in the recently expired government guarantee? I thought that it was only the finance companies which needed to be bailed out? And wasn't there some implication that there was awareness that SCF didn't meet the standards for a guarantee but that everyone looked the other way and guaranteed it anyway ?

I suppose it could be argued that this prevents any future cowboy behaviour in the banks, but it seems to me that - in NZ - it was the finance companies which needed better risk regulation.

Why should the poor depositor be at risk of a haircut? This is not much better than making the taxpayer pay up.

Should they decide that depositors as well as bondholders take losses, we would move our deposits to Australia.

by Colin Riden | 11th Nov 11, 5:15pm 1320984940

The bank's wholesale deposit guarantees remain in place till they expire at slightly different times around the middle of next year.

by Alex13 | 11th Nov 11, 5:55pm 1320987332

"Should they decide that depositors as well as bondholders take losses, we would move our deposits..."

Isn't this the arrangement already since there's no retail bank deposits guarantee in place any more?

by Andrewj | 11th Nov 11, 4:52pm 1320983559

The same reason the banks were allowed to issue covered bonds, then a taxpayer backstop in the leaky home problem (that starts with the last national government), OBR is just the next step in defending the banks. The fact they need such state largese tells us a lot about what the RB see's in its chystall ball. They must fear something horrible and their job to protect the banks at any cost is obviously paramont in their thinking, so banks must be at great risk of they wouldn't be going to such extreme lengths. Untill they fear that the last thing they may hear in life is the rope snapping tight, they will go on putting banks ahead of people.

by Andrewj | 11th Nov 11, 4:56pm 1320983801

someone else posted this, its great.

On a number of occasions in recent months, I’ve pointed to the elevated cost to investors of insuring their Australian bank debt via CDS. There is a pretty clear relationship between that rising cost and European troubles. The chart above shows you what I’m talking about (the price today is 181).

CDS prices signalling something about our banking system. It’s the same vulnerability took all four big banks to the brink of insolvency in 2008 before they were bailed out by the tax payer with funding guarantees: dependence on wholesale debt.

http://www.macrobusiness.com.au/2011/11/sp-thanks-you-for-supporting-th…

So there it is people. In black and white. Your ongoing but idle guarantee of the banks is all that stands between them and some nasty downgrade action that could take them (and us) into some kind of deflationary loop. Moody’s has already said much the same.

by KW John | 11th Nov 11, 5:42pm 1320986540

I still don't understand the Australasian 'Four Pillars', and how they relate to the rest of the world.

'Building societies' was one MB description. They're not 'Primary bond dealers' (Iain).

There is still something very 'colonial' about the whole set-up... is this our choice?

by KW John | 11th Nov 11, 10:19pm 1321003190

Thank you Iain, sorry, slow learner. You've certainly explained this one before...

by KW John | 12th Nov 11, 1:17am 1321013849

What nags at me is the notion of 'sovereignty' that we cling to. It grows more and more fictitious/delusional. Australasia seems to be 'held back' from developing as anything more than raw commodity producers (colonies).

Thanks again.