NZ banks (too) highly leveraged

Banking / opinion

Shareholder capital leveraged 15.7 times by NZ banks, giving effective loan to value ratio for banks of 94%; Kiwibank the worst at 21.6 times

13th May 11, 7:09pm by David Chaston

By David Chaston

Most New Zealanders don't realise that their banks rely on only a slim cushion of shareholder capital to survive.

Figures from the banks' general disclosure statements show they have total shareholder funds of NZ$21.7 billion behind NZ$340.6 billion of assets (mainly loans). That means if the value of those assets ~~loans~~ was to drop by 6.5% the shareholder capital in those banks would be wiped out.

It means the owners of these banks effectively have NZ$21.7 billion of equity against assets 15.7 times larger than that. That's an effective loan to value ratio of 93.6%. For any home owner that would be a very aggressive level of leverage, but for a bank it's seen as normal.

[ Update: Since this article was originally published, some of the latest data, especially relating to ANZ, has been revised. You can stay up with all data updates on this permanent page here » ]

Yet the Reserve Bank of New Zealand said as recently as this week in its 6 monthly Financial Stability Report it was comfortable the banking system was "reasonably placed" to support the economic recovery.

Many commentators have argued the Global Financial Crisis was caused by financial institutions lending too much and being too leveraged.

So let's look at the leverage now built into New Zealand's banking system.

It's not a pretty picture.

The data on this page is sourced directly from each bank's quarterly General Disclosure Statement (GDS). 'Leverage' refers to the number of times the total assets of a bank (principally their loans and advances to clients) are larger than the shareholder's investment (including retained earnings) in the bank.

If you are a customer (borrower) of a bank, they will expect you to be prudent in the gearing of your affairs - a typical leverage of a trading or manufacturing firm would be 2:1 - that is something like two dollars of assets for each dollar of borrowing. But they don't apply anywhere near as stringent standard on themselves.

The level of leverage is important for investors who take a term deposit with a bank - and equally important for taxpayers who may be asked to bail out insolvent banks. If the value of their loan book needs to be written down for any reason, the level of leverage gives you a good idea of how much stress they can suffer before the shareholders are wiped out. The higher the leverage, the less stress they can tolerate.

'High shareholder returns'

High leverage allows bank shareholders to earn very high rates of return. Unfortunately shareholders have gotten used to these high returns and expect management to continue to deliver them. High shareholder returns are relatively recent attributes for banks - and many analysts, including increasing numbers of regulators, see them as inherently dangerous for these very large institutions.

There are great moral hazards involved.

It is up for debate about what a prudent level of leverage should be, but it certainly should be a 'single digit' (that is, less than 10 times) and more likely in the range of 5x to 7x.

On that basis, New Zealand banks are vastly under-capitalised. To bring them down to 7x, shareholders would need to add more than NZ$25 billion in capital to support the business they do here - although to prevent that, the banks would no doubt argue that if a leverage limit like that were to be imposed, they would leave the capital at the same level and reduce their loan books - which could take more than $150 billion "out of the economy" (equivalent to demanding that every loan be paid back by 50%).

Lower returns might also see them reduce their investment as well. The size of the problem is daunting, and could not be fixed inside a generation. But 'extending-and-pretending' will not reduce the risks to our economy. At some time in the future, stress levels will rise and create a crisis, one that will make us all very much poorer.

It is the job of the Reserve Bank to regulate banks, and they report on how they are doing in their half-yearly Financial Stability Reports.

De-risking banks is an important public task, and shareholders are going to need to accept lower returns when that happens.

Updated 17 May 2011
(see Notes below)	ANZ- National	ASB	BNZ	Kiwibank	Rabobank	SBS	TSB	Westpac	*Totals*
	times	times	times	times	times	times	times	times	times
Leverage: the number of times Assets exceed shareholder funds
Mar-08	12.0	20.0	14.3	22.4	23.1	15.6	12.5	11.8	13.8
Jun-08	11.9	18.6	14.7	22.2	21.1	15.9	12.4	12.4	13.8
Sep-08	11.7	24.2	16.3	27.3	21.2	15.6	12.4	14.5	14.9
Dec-08	13.2	24.3	19.2	32.3	22.3	17.0	12.1	11.1	15.5
Mar-09	12.5	23.7	17.9	27.9	22.7	16.3	12.6	14.9	15.7
Jun-09	11.8	20.7	18.6	29.2	24.5	15.9	12.4	14.8	15.2
Sep-09	11.7	20.4	18.7	28.0	24.8	15.6	12.6	14.5	15.1
Dec-09	11.1	19.5	16.9	28.6	26.0	15.3	12.9	14.4	14.5
Mar-10	10.8	18.7	16.9	26.8	25.0	14.8	13.3	14.4	14.2
Jun-10	10.5	17.9	17.2	20.8	26.0	14.4	13.1	13.8	13.8
Sep-10	11.1	17.4	17.4	21.3	11.6	14.2	13.0	13.6	13.9
Dec-10	15.6	16.7	17.4	21.6	11.2	13.9	13.3	13.6	15.7
Mar-11								13.7

This data is calculated from the following ...

(see Notes below)	ANZ-National	ASB	BNZ	Kiwibank	Rabobank	SBS	TSB	Westpac	*Totals*
	NZ$mil	NZ$mil	NZ$mil	NZ$mil	NZ$mil	NZ$mil	NZ$mil	NZ$mil	NZ$mil
Total Assets:
Mar-08	112,514	58,043	58,958	6,618	4,933	2,426	3,169	48,988	295,649
Jun-08	114,896	59,350	60,243	7,230	5,241	2,565	3,282	51,015	303,822
Sep-08	117,891	62,933	64,209	8,183	5,534	2.612	3,404	54,509	319,274
Dec-08	132,127	65,343	76,086	9,430	6,015	2,565	3,651	55,951	351,169
Mar-09	127,941	65,530	73,301	9,759	6,303	2,541	3,832	54,368	343,575
Jun-09	121,896	65,230	70,175	10,371	6,582	2,565	3,924	54,584	335,327
Sep-09	117,891	64,784	69,862	10,786	6,847	2,612	4,056	54,509	331,347
Dec-09	115,103	64,650	67,732	12,019	6,936	2,661	4,300	55,357	328,759
Mar-10	113,577	64,581	67,268	12,076	7,107	2,628	4,405	56,254	327,896
Jun-10	113,258	53,557	68,005	12,238	7,376	2,581	4,418	55,200	326,633
Sep-10	116,458	64,750	69,647	12,642	7,103	2,572	4,485	55,179	332,837
Dec-10	124,541	63,496	68,634	12,969	7,178	2,826	4,721	56,293	340,658
Mar-11								57,695

and ...

(see Notes below)	ANZ-National	ASB	BNZ	Kiwibank	Rabobank	SBS	TSB	Westpac	*Totals*
	NZ$mil	NZ$mil	NZ$mil	NZ$mil	NZ$mil	NZ$mil	NZ$mil	NZ$mil	NZ$mil
Total shareholder funds:
Mar-08	9,381	2,900	4,118	295	214	155	253	4,136	21,452
Jun-08	9.655	3,199	4,096	326	248	161	265	4,105	22,055
Sep-08	10,088	2,600	3,933	300	261	167	275	3,764	21,388
Dec-08	10,036	2,693	3,953	292	270	151	302	5,031	22,728
Mar-09	10,252	2,765	4,087	350	277	156	303	3,648	21,838
Jun-09	10,333	3,158	3,770	355	268	161	316	3,679	22,040
Sep-09	10,088	3,176	3,745	385	276	167	323	3,764	21,925
Dec-09	10,366	3,323	4,006	421	266	174	332	3,842	22,730
Mar-10	10,532	3,456	3,975	450	285	178	331	3,908	23,114
Jun-10	10,797	3,548	3,956	589	284	179	337	3,995	23,685
Sep-10	10,446	3,726	4,002	593	614	181	344	4,048	23,955
Dec-10	8,004	3,810	3,944	600	638	203	354	4,134	21,688
Mar-11								4,209

The term 'leverage' is used loosely on this page. For a fuller discussion about what it really means, see here »

Update: Since this article was originally published, some of the latest data, especially relating to ANZ, has been revised. You can stay up with all data updates on this permanent page here »

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48 Comments

by scarfie | 13th May 11, 7:30pm 1305271800

I am still struggling to see how their loans of $340B can be more than M3, $228B.

by David Chaston | 13th May 11, 7:43pm 1305272623

The assets on a bank balance sheet are [much] more than their loans to customers. Those loans may be the biggest part, but there is much more to the 'assets' of most banks. And that is part of the problem ...

by scarfie | 14th May 11, 2:09pm 1305338977

That reads better:)

I would like to know what their fixed assets are though. Do they actually have title to real estate? What happens to their balance sheet if those tank as well?

by Gertraud T. | 13th May 11, 8:25pm 1305275115

Thanks David for this shocking clarifications.

So Kiwi Bank is the most vulnerable. Very disconcerting.

by steven | 13th May 11, 8:39pm 1305275969

Yes and no.....Kiwibank has the least exposure to rural lending? which I think is a bigger risk....also I believe they used to not like to lend past 80%....so the current numbers are interesting but may not be as bad as at first glance....

If someone has more data/numbers I'd be interested to read.....certainly these numbers strike me as way too high for all of them....

regards

by Gertraud T. | 13th May 11, 9:04pm 1305277482

Kiwi Bank is aggressively advertising again 95% loan to house value.

http://www.kiwibank.co.nz/personal-banking/home-loans-options/

by steven | 13th May 11, 9:21pm 1305278462

wow, crazy.......given the slow drops per annum since 2007, that could mean in 2 years time the property is under water........seems crazy to me, have they learnt nothing?

The URL doesnt work btw....but I found their clculator which works on 5%....ouch.

regards

by pwilkie | 14th May 11, 12:25am 1305289505

it would seem that with home loan,s with a deposit of 20% or less mortgage lender,s insurance is mandatory--thiis can be up to 2% of the borrowed amount--which more often than not will be tacked onto the loan i would suspect---i searched nz banks for fee information re this but drew a blank---it seems to be a nice little earner for the banks and their associated insurers---how many people know they,re paying to protect the bank if they default---another problem or issue with this product is that it,s not portable--you refinance with a low deposit or equity and you,re up for it again--life,s a minefield

http://finance.ninemsn.com.au/blog.aspx?blogentryid=801486&showcomments=true

by scarfie | 14th May 11, 1:47pm 1305337621

And which insurance company would you trust to insure you mortgage?

by pwilkie | 14th May 11, 5:46pm 1305351968

given the recent events, here in brisbane and Christchurch using trust and insurance co,s in the same sentence would appear to be a contradiction in terms---if the banks were to exhibit some financial prudence the need for this type of insurance would become redundant--i looked at the kiwi bank loans site and they will lend to a house hold of up to six people who i assume all go on the loan contract--it,s setting them up to fail

by Curious | 13th May 11, 8:40pm 1305276006

Hi David

Do you know what the leverage would be for the other borrowers if covered bonds were excluded from the calculation? Is it actually relevant?

by robby217 | 13th May 11, 8:53pm 1305276786

Any off balance sheet items we should know about?

by Basel Brush III | 13th May 11, 9:05pm 1305277500

Is it any wonder the banks are not pushing the mortgagee sales?

Does that mean every time they lose $50k on one loan they lose $1m extra loans they can offer?

On the bright side a couple of weeks of borrowings would set Kiwibank up well.

Also reversal of the tax cuts ($170m/week we are informed) would do the same in under a month.

Boom Boom!

by steven | 13th May 11, 9:15pm 1305278115

I wondered wht that cut was worth....where did u see $170million a week?......that cuts our "problem" in half...if thats right........not keen to pay more tax, but I'd rather pay a bit more now than a lot later.

regards

by Basel Brush III | 13th May 11, 9:38pm 1305279506

As quoted by Labour's Ahearn on TVNZ and it was not contradicted by the Nat on there with her.

by walker janette | 13th May 11, 11:55pm 1305287716

David, have a look at Chart 3 shareholders funds for rabo, I seem to remember Rabo did a big share float to get in more money, The time frames fit.

by the_dc | 13th May 11, 10:57pm 1305284220

Suppose a bank starts with 1mil capital. It receives 20mil in deposits, which it promptly lends out. So it's loan to deposit ratio is 1:1, which as a depositor, you would say is fine, because how can the bank give you a return if it doesn't lend the money out? But David would say this bank is leveraged 20:1 (OMG!)

by David Chaston | 14th May 11, 1:15pm 1305335700

You make a good point. But I don't think 1:1 loan-to-deposit ratio is a good standard, and $1 mil of capital supporting $20mil of loans is not good either. It does work, though, and it is working now. But would it stand a bump-in-the-road?

My argument is that the overall relationship between what shareholders have invested and the total assets is a key measure of the stress a bank can absorb. Depositors are relying on bank management to collect all those loans so they can be repaid, with interest. In times of stress low capital levels will more easily tip the bank over, and the resulting losses will get socialised.

But I am not saying we are at imminent risk right now, just that the long-term relentless rise in leverage is going the wrong way, and needs to be reversed. It has taken some time to get to this higher-risk position, and it will take a long concerted effort to reverese the trend back to a safer position.

As at Dec-10, according to the G3 data published by the RBNZ, NZ banks had about 7.5% more in customer deposits than they loaned out to customers. That level is historically low. Ten years ago it was over 35%.

I have charted that relationship here >> http://www.interest.co.nz/images/deposits-to-loans-ratio.gif

When the deposits:loan ratio is nearly 1:1, the bank shareholders are using little of their at-risk capital in the business of lending. Its nearly all depositors money being used for the business of banking. If anything goes wrong with their lending (or for that matter, anything goes wrong with their other wholesale / investment banking / funds management / treasury activities), the consequences and resolution will have to be handled by the taxpayer.

Bank balance sheets need to be de-leveraged. That will lower risk. That will also mean shareholders will have to accept lower returns (they are very high now). High returns usually indicate that investment risks are high - but shareholders are getting all the payoff for this high-risk strategy (one they have put in place) although in the event of severe stress the costs will be borne by others. There is a clear public policy interest in lowering these risks.

by the_dc | 14th May 11, 3:23pm 1305343386

Agree with your basic premise that too much leverage is systemically dangerous. But, we have to remember that a bank's purpose is to make use of the savings pool by lending it out. Ideally to fund productive ventures - and this is where banking has gone wrong in the last decade or so, by excessively funding the unproductive residential real estate sector.

I think the most pertinent ratio for the NZ banks is the offshore funding ratio, which thankfully has been trending down since the GFC, but still has a way to go. Hopefully we can get to a point where NZ's domestic lending is funded by its domestic savings and we are therefore less at the mercy of international financial crises.

by Gertraud T. | 13th May 11, 11:28pm 1305286114

Slightly off topic but non the less interesting information not reported on the main street media. I don't know who stands behind this website, but I did read same information on other sites as well.

Libya - all about oil or all about banking

http://truthout.org/libya-all-about-oil-or-all-about-banking/1302678000

by steven | 14th May 11, 6:48pm 1305355696

In terms of oil, I cant see it...mostly once a revolution occurs it takes years to get oil production back to its old level.....in Iraq's case the US isnt getting exclusive access to the iraqi oil and they wont this time so i cant see aits a gain....so I cant see a background conspiracy....

regards

by philthy | 14th May 11, 12:19am 1305289171

Ok if anyone is so slow that they haven't picked this up yet, then they never will.

Banks and a lot of corporations will never ever ever ever act responsibly with other peoples money, unless they are absoutely forced to do it, by regulations, so you'd better make certain that they are.

If we want to people to invest in corporations, then we need to be very up front about how much of a risk people are taking by doing so, and not allow them to hide it, like which is currently the case.

Market forces is the biggest myth there has ever been.

by Andrewj | 14th May 11, 7:12am 1305313927

Wow, all that extra money pumped into our economy. if the banks head back to 7X then our economy will look like Nigeria without the oil.

Here in North California houses are soo cheap. just saw 45 acres with nice 3 bedroom 2 bathroom house for 120k. Todays blog on oftwominds.com has a piece on florida.

by steven | 14th May 11, 8:21am 1305318113

Came across an interesting piece on share price of banks....basically it clearly shows the share price is highly linked to the profit margins and how much banks can extract, it also pretty much said that there was no link to how healthy an economy was doing to how well banks did....just on how much a bank can extract.....

I think Steve Keen? laid out some great pieces looking at the effect of debt and leveraging on an economy and it pretty much showed that we have got to the stage that we have to leverage more every year just to tread water....let alone grow....I also think this is the result of raw materials not being cheap any more, ie for a capitalist society we have to have a large multiplier between raw and finished to get growth and "adequate" profit....once raw materials got too expensive the only way left to get that profit was to rob that margin from the future...which is what we have done for at least 20 years.....enter the likes of GS....

I find that price in California fasinating....I would assume US building labour is more expensive, yet the houses cost less and just looking at their materials they get to use and the cost of the materials make me drool (Im a keen diyer).....Crazy things on prices in NZ...I can make solid composite bamboo kitchen cabinets at the same cost or less than the flat pack stuff using melamine....or even buy crappy pine finger jointed boards in Bunnings etc, that makes no sense.....

regards

by speckles | 14th May 11, 8:05am 1305317135

Andrewj.... I know there is great opportunity in the US in property and business but do you think they want to hear it here :-) Can't recall a positive comment on the US ever on this site.

If in North Cali, checking out Lake Tahoe?

ps All the best with your travels!!!

by scarfie | 14th May 11, 2:06pm 1305338792

You will occasionally see me putting in a plug for the yanks. Mostly because they are bigger than anyone else, like three times bigger, and thus have a better ability to weather the storm ahead. I like to look at it from the angle that they are bigger than the next three combined.

Do I think America will avoid depression, no as they still have to balance the books.

What I am saying is that to balance the books they are going to turn to demanding rather than borrowing. ie: you want us to protect you, well how are you going to pay for it? They are the first empire ever to borrow to keep its status, but that doesn't mean they have forgone their option to extract tributes. This is why they want the free trade agreement with us.

America has the ability to secure the world depleting supply of oil for themselves. They also have a surplus of food, and even if this world supply of food diminish because of the lack of oil, America will still be in a better position than anyone else.

by Gertraud T. | 15th May 11, 11:36am 1305416175

scarfie

you are putting a plug in for the yanks, "they have enough food and oil"

For how long? Besides many other problems, the common practices in the US dominated by Monsanto show horrifying effects: Dr.Huber, scientist, reporting about a new pathogen depleting soils of vital elements, causing crop death and spontaneous abortion in animals which seriously undermines food production.

http://vimeo.com/22997532

Besides, a government justifying and approving torture (and then calling it "enhanced interrogation technique") is not only barbarous, but outright stupid, everybody knows that under torture everybody confesses to anything they want to hear.

In Europe empress Maria Theresia (1740-1780) was the first to legislate the abolishment of torture by law, in the US in the 21.th century it is government approved. Great!

by Kunst | 14th May 11, 8:49am 1305319758

Andrew's trip.

I’m wonder, when Andrew is coming back from his trip to the “rest of the world”, how he judges on a “100%pure NZ Economy” and the slogan “Small countries have to think small, but with bigger ideas” ?

by Wolly | 14th May 11, 10:18am 1305325107

I am puzzled as to why people think the RBNZ would report the truth....lying is seen as a way to bolster confidence as is cheap credit.

piigs has become piignzs........

There is no escape from the Elephant...fools who bought the banking line about low cost mortgage debt stand to be shafted by the legal system that allows the banks to force the sale of assets...to hunt down the debtors and feed off them for life. The vineyard "owners" across NZ are discovering this truth. Many home owners have had some serious lessons in finance and law..

Bullshit to one side this country is trapped in debt and close to being unable to pay a way out...the banks decide fiscal policy and govt dictates RBNZ policy....debasement is the planned approach to wash away the debts and so bail out the party rump behind the throne.

Expect the BS to increase in intensity as November approaches. The budget will be a mass of promises and spin. Labour will embark on a journey into greater deception both of itself and any idiots who can be persuaded that cunliffe and crew have a better way out of the financial bog, which they helped create in the first bloody place.

by Christov | 14th May 11, 10:47am 1305326872

I think the IMF had a little chat with the Bolly Bib.....Wolly...not the other way round.......

probably something like .."well if we can see what you and your bosses have been up to.....it's.... er... only a matter of time...till you get ratted out and hung up to dry....so uh your call yeah...?

by OMG | 14th May 11, 2:22pm 1305339723

Money as debt,

http://video.google.com/videoplay?docid=-2550156453790090544#

Anyone seen the sequel? Money as debt 2

http://www.youtube.com/user/compelled2283#p/c/879A14495D29C64F/0/_doYllBk5No

by PhilBest | 14th May 11, 7:02pm 1305356556

Hmmm, what have I been saying for SO LONG, about Kiwibank? I have just had a bit of a search for the first time I said something on it. Looks like I said THIS on Kiwiblog in Oct 2008, THANK YOU, everyone.

"............it is no accident that the smart money is going OUT of NZ and certain other countries right now, and INTO the USA.

The most fundamental indicator, is the extent to which a country’s housing market inflated relative to people’s incomes. And NZ was the worst in the world along with Ireland and Spain. So NZ needs to face up to the worst now. We are not “being dragged down by international events” contrary to popular belief, we are being PROPPED UP by the overseas ownership of our finance sector in so far as it is owned overseas. The domestic sector is a GONER and you can bet that KIWIBANK is sitting on one HUGE black hole."

“….The domestic sector is a GONER and you can bet that KIWIBANK is sitting on one HUGE black hole….”. Sorry, meant to add to that, that is in line with the general principle, the greater the political involvement, the bigger the blowout – think “Fannie Mae” and “Freddie Mac”. GREATER Government involvement NOW will only make the NEXT blowout take the State itself down directly rather than the finance sector. And Labour was moving to address the “housing affordability” issue by TAKING EQUITY in first home buyers homes. I REST MY CASE."

I said a lot SINCE then..........I SAID IT here on interest.co on a thread about Kiwibank getting aggressive with their mortgage lending:

by PhilBest | 13 Oct 10, 11:04am Oh, brother. Think Fannie

"Oh, brother. Think Fannie Mae, Freddie Mac. There's never a bubble so big as the one where taxpayer money stood behind the last institution still huffing and puffing it up.

Nicholas Arrand said ".....Just the first two paragraphs are enough to make me glad I don't have any deposits with Kiwibank. Run far, run fast......"

Sorry, the poor bloody taxpayer can't do that - unless they leave the country.

I wonder if any hedge funds have worked out ways to short Kiwibank?"

by steven | 14th May 11, 7:40pm 1305358800

2 Qs,

1) Are they lending so agresssively because the Govn/owners insists? Seem to recall the last CEO walked recently, maybe this is why.....

2) Are the OZ banks significantly any better? in effect they are exposed to two housing bubbles, where Kiwibank only has one....residential and in NZ.....then there is farming which Im not aware kiwibank has been a significant player in?

Freddie and Fannie were totally different...the US market was simply fradulent and un-regulated and un-managed....not so here. Not to mention the actions of the private sector US banks were and are worse....and whos lobbyists ensured the gravy train continued....

Lets not forget that private individuals have borrowed because they have been allowed to with virtually a free hand mostly to dodge tax....you know have cant really have a "free-market" and personal responsibilty on the one hand and stop ppl lending on the other....its known as having your cake and eating it, doesnt work mate....

regards

by hamrod | 16th May 11, 10:40am 1305499202

I think farming represents possibly the biggest risk. What happens if farming has a few bad years? Its not like that hasn't happened before.

With the level of indebtedness in farming and what appears from this article to be a total lack of tolerance built into the banking system.. it might push us into bailout territory.

by Andrewj | 15th May 11, 6:21am 1305397260

on dairy debt

http://www.stuff.co.nz/business/5005469/Dairy-farmers-deep-in-debt

by steven | 15th May 11, 9:17am 1305407825

The debt is the interesting thing all over, NZ farmers (dairying at least) would be doing very well if it wasnt for the huge debt they seem to have....just have to wonder how long they can survive if the high payouts go back to norms....it just seems so silly to me.......a depression right now would be really bad IMHO....devistating....and this would seem to apply to many sectors....

regards

by Roger Witherspoon | 15th May 11, 10:39am 1305412761

Excellent stuff David.

It is odd how we kow tow to borrow from an organisation that is far more leveraged than we are.

Congratulations on ignoring anything other than shareholders funds. Too many people in big business seem to think capital includes borrowed money if the amount is large. They confuse the concept of capital as equity with the vague and woolly idea of capital as a large sum of money which it's okay to spend on anything they can justify to themselves as an investment. They talk glibly about "cost of capital" when they mean interest rate.

Banks have a dangerous and cosy position in our society which they have managed to engineer over a long period of time.

In our desire to encourage a society of home owners (which I regard as a good thing - it seems to encourage responsible citizens) we have encouraged the banks to lend more and more. The unfortunate result is we have bid up the prices of our houses amongst ourselves to levels that prevent out children from affording them. This was a silly thing to do.

Banks do have a legitimate function as a intermediaries between lenders and borrowers but we have somehow encouraged them to outwit us.

They provide a service that is not subject to GST, unlike the provision of bread and beer.

How did this come about? My guess is governments have just steadily ignored the problems, being themselves largely cap in hand to banks in order to borrow to get re-elected.

When you borrow, whether as an individual or as a government, there is a loss of freedom (we call this a loss of sovereignty at a government level). As a mortgage payer one is an indentured serf. That is the unfortunate truth.

Personally I think we need to look very hard at reversing the rachet of bank favourable thinking in our society.

There are three areas I can think of immediately:

1 Why do banks not pay GST?

2 Why is interest tax deductible?

3 Why do we allow the bank to bankrupt people if they cannot afford their payments?

On the last point, if we allow banks to have recourse to an individuals' entire wealth they will lend more recklessly than if all loans are non-recourse and only subject to the collateral of the item lent against.

Banks are our society's holy cows. Why do we allow this?

Bank favourable thinking infects our thinking like a virus. Would your local council build sports stadia with wild abandon if they had to save up the money first? They justify their profligate ways by thinking they are leaving an asset to the next generation when in fact they are often leaving a far greater liability too. It's the next generation that will have to pay off the loan after all.

by Les Rudd | 15th May 11, 11:36am 1305416207

Useful article David. Ditto what I said here:

http://www.interest.co.nz/news/53406/reserve-bank-says-global-financial-crisis-may-have-increased-big-four-banks-market-domina#comment-618806

Have a look at the article linked by KW John, 'The Capital Rort'.

And our RB's hands are where? If they can see the risk in agricultural lending (now enforcing tighter buffer regs.) why not elsewhere? Err, everywhere?

Why don't they act? What holds them back?

Cheers, Les.

www.mea.org.nz

by steven | 15th May 11, 8:22pm 1305447735

The worry that they could cause a rout....

regards

by Les Rudd | 15th May 11, 8:31pm 1305448278

It hasn't held them back re. ag. lending adequacy regs. To avoid a rout it needs phasing-in, as they have with CFR. Timescales would be longer but I think a rout could be avoided with same, careful, but steadfast, approach.

So if it's not collapsing the house of cards, what else?

by steven | 15th May 11, 9:04pm 1305450277

oh I agree, the banks are just going crazy.....A decade ago kiwibank would only lend me 1/4 of what they will lend me now and 80% not 95% as well.....we really needed to have limits 10 or at least 5 years ago....the chances have gone....

Personally I think JK etc are going as fast as they can to correct the imbalance in property....given the real risk it could go pear shaped....

regards

by steven | 15th May 11, 8:20pm 1305447604

Paul Krugman on the GFC (warning its over an hour!)

http://www.youtube.com/watch?v=6ZPcgXx7doY

by cam | 15th May 11, 9:56pm 1305453392

Hmmm so I guess the next National Govt will be sticking lipstick on the pig and look to sell it off to the mum and dad investors

by steven | 15th May 11, 10:01pm 1305453660

Depends on the pig and the price.....SOE's like Meridian could be worth buying.......they could hold their price....but I suspect they would be over-subscribed and hence over-priced. Really there is little left to sell....

regards

by mgdwalker | 19th May 11, 6:47pm 1305787659

Hi David, you mention that the taxpayer might eventually pay for bank losses, or socialize the losses of NZ banks, should NZ banks become stressed/insolvent. In an article by Gareth Vaughan recently it appears that the RBNZ is considering imposing losses on depositors as unsecured creditors of the banks, should banks become insolvent during a crisis. Gareth reminds us in his article that a depositor is in fact a lender to the bank and therefore a creditor. In the event of a NZ bank failure, in your view, will the NZ government bailout depositors in NZ banks with taxpayer money, or impose losses on depositors as unsecured creditors. What is your view on this possible outcome?

RBNZ sets out to ensure shareholders and creditors absorb cost of any bank failure not taxpayers

By Gareth Vaughan

Created 25 Mar 11, 11:19am

March 28, 2011 - 04:44pm, Gareth Vaughan [1]

by kane02 | 20th May 11, 12:08am 1305806892

Hi David very interesting article.

Can you advise why in qtr Dec 2010 ANZ Nationals assets rose by close to $8b yet equity fell almost $2B or 20%?

This is scary stuff.

Was it an impairment adjustment?

The banks are saying that impairment allowances are currently being released, or reversed which would suggest that equity should be rising dramatically. The reverse appears to be occurring here. (Granted data is only up to Dec 2010)

Or is it a case of cooking the books? Because to the untrained eye it looks and smells distinctly like a "fudge" to me. I'm guessing there may be some nervous execs / auditors / officials at the rbnz at the moment

Appreciate some insight

by Robert M | 20th May 11, 11:07am 1305846442

Hi David, what do the banks assets consist of if not their loans? Does it vary from bank to bank?

by kateH | 25th Aug 11, 5:57pm 1314251853

Hi there! I've just learned that the amount of banking companies on the Federal Deposit Insurance Corp.'s list of banks most at risk to crash is lower than it was in the first quarter of 2011. That amount has not fallen for nearly 5 years. While growth is indicated, it has been slow and the FDIC remains cautious. I found it here: Number of issue banks falls in second quarter. I think it would be a good news despite the fact that it indicates development in the banking industry but some say that there's an error in the report of the FDIC and there's an interpretation in the record that was not given by the said agency. They said that if the data and its other side will be studied further, there's no improvement to be stated.