Opinion: Bernard Hickey argues the RBNZ should nudge the banks to 'burn some profit fat' rather than pass on higher funding costs to borrowers and savers. Your view?

Opinion: Bernard Hickey argues the RBNZ should nudge the banks to 'burn some profit fat' rather than pass on higher funding costs to borrowers and savers. Your view?

By Bernard Hickey

Will the banks burn their fat reserves?

Will the banks choose to use their profit ‘fat’ to help the New Zealand economy cope with the European crisis over the next year?

That’s the big question arising from the Reserve Bank’s Monetary Policy Statement (MPS) today, which highlighted the risk that higher funding costs for the banks’ foreign borrowings may push up retail interest rates.

The Reserve Bank seems willing to let the banks pass it on and even soften the blow by cutting the Official Cash Rate to compensate, leaving mortgage rates and retail deposit rates unchanged.

This is the key section in the MPS:

“Although New Zealand banks are currently well funded, bank funding costs are likely to increase to some degree over the coming year. This is likely to put some upward pressure on retail interest rates relative to the OCR. Monetary policy will need to take account of these pressures.”

But why is the central bank helping the banks support their record high profits?

The Reserve Bank’s own figures on the banks’ net interest margins show they have increased by about 50 basis points over the last 18 months as borrowers have shifted from fixed rates to floating rates, which are more profitable for the banks.

Why don’t the banks use some of that profit ‘fat’ to soak up the pain of higher international funding costs linked to the European Financial Crisis?

And why is the Reserve Bank enabling them to keep those profits high by further keeping the OCR low, or even cutting it? The Reserve Bank has already eased up on the banks by delaying a deadline for them to increase their Core Funding Ratios by about six months.

This is shaping up as the main economic and political battle of the next year or two.

Will the banks support the New Zealand economy by using that profit fat to keep interest rates flat, in line with the Reserve Bank’s OCR.

Who will force them to use that fat if the Reserve Bank won’t?

A sneak preview of this battle is playing out across the Tasman where an official cash rate cut on Tuesday was not immediately passed on by the same four banks that dominate our banking market. They took more than two days to pass it on, playing chicken all the while until ANZ broke the logjam.

There’s fat there for the banks to burn. They need to build up a sweat to help our economy.

(Updated to include decisions eventually by Australian banks to pass on the OCR cut in Australia)

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Bernard - Julia Gillard knows the answer to your question:

"Will the [Australian] banks support the New Zealand economy by using that profit fat to keep interest rates flat, in line with the Reserve Bank’s OCR." 

So what hope does NZ have? Especially given the kind of RB we have?

(See today's 90 at 9.)


Why on EARTH would an Australian (or any) bank reduce its profits to help the New Zealand economy? Their sole responsibility is to their shareholders.

I believe it's called capitalism...

John B

The problem there is the banks now have an implied govt guarantee and three of them (ANZ, BNZ and Westpac) still have NZ$9 billion of govt bonds outstanding.

Those banks have a responsibility to the wider economy and rely on the taxpayers of New Zealand for their guaranteed existence (and profits).

Also,  these banks should see their long term future depends on the health of the New Zealand economy.

It's a classic trade off between short term profit growth now for larger profits in the long term.




Bernard, Bernard, Bernard - Nice strategy on your part to promote discusion on this isssue but you are truely dellusional if you think the Banks have a social conscience.  

They are purely their for their shareholders, and are continuously working out ways on how best to extract the most from their customers, whilst trying to portray to the masses that they to are a casulaty of the worlds financial woes. We have seen this of late defending their enormous profits, and paving the way for the implementation of new initiatives with rhetoric about what is happening in Europe and their ability to borrow.

The Bankers arent dum, they know that occasionally the toothless Lion (Government) rears its ugly head from time to time, telling them that they want to see mortgage rates fall - but as per normal, nothing happens.

The Banks Social conscience to you me, and the man round the corner, is when they give their workers the day off to go and pick up rubbish, and nothing more.

They all want their pound of flesh now, not latter.

"The problem there is the banks now have an implied govt guarantee and three of them (ANZ, BNZ and Westpac) still have NZ$9 billion of govt bonds outstanding."

What are you referring to exactly? There is no deposit guarantee scheme anymore.

Also govt bonds, are bonds issue by the Govt. If banks are holding these, this represents their lending to the govt. I don't think that's what you meant.

This is Land Communism John: Bernard wouldn't know anything about capitalism, or more importantly, voluntarism and freedom.

But Bernard, so we can light the oil drum of unintended consequences, how do you propose these banks 'be made' to use their profits? Perhaps forced lower interest rates so people can borrow at artficially low prices and take on more debt?

Um, no, hold up, that's how the whole GFC started wasn't it?

And wouldn't that contradict all your property posts: you know, bust the house market and all that?

Quick, over there, it moved, regulate the bloody thing before someone gets a nose bleed. And over there, two consenting adults transacting voluntarily amongst themselves, that's awful, get a bureaucrat in there, we need to know what's going on, they've got to be regulated, the government has to get its cut . ..


Those banks have a responsibility to the wider economy ...

Out of interest; have you read Atlas Shrugged, Bernard. What did you think?


Are u suggesting that the Banking system is somehow "freemarket"...or "Capitalism at work."

Doesn't take much to realize that the Banking system is a public/private partnership.

Banks COULD NOT survive without a Central Bank to provide Liquidity.

With the Model they use......  they wouldn't last long in the "real world" of consenting adults transacting.... tehy would quickly go the way of the failed Finance companies,

With the levereage they use and the nature of borrowing short term and lending long term.... They would be a far worse disaster than the finance companies were.

The ONLY thing that makes it work... is the lender of last resort...  ( Central Bank )

Historically when Banks needed Central Bank support... it would be at "penalty rates"... BUT they don't even do that now.... Banks are now given money at "giveaway" rates.

NOTHING and I mean NOTHING.... Free mkt or "Atlas Shrugged" about that...



No Roelof, I'm not saying that, as you say, we have a crony capitalist system which is to laissez faire capitalism as sea horses are to horses. That is the problem. If there's a central bank, it's a planned economy.

My point was Bernard would never go the way of arguing freedom - get rid of central banks, move to sound money and laissez faire; his first instinct is always to reach for the big gun of government and regulate and tax and distort every damned thing.

NZ and the West do need to finally try something new, but not more and more Statism on top of the slippery slope of Keynesian socialism: it's got classical liberalism and laissez faire.

Chances of seeing that in my lifetime - probably none. When Europe falls it's far more likely to do the deathly totalitarian dance all over again. And what people like Bernard and Gareth don't seem to understand, because I can only assume they've not red philosophy and history, is they're apologists.

I meant to say in my last post if Bernard reads Atlas Shrugged (by Xmas challenge Bernard) he should pay particular attention to the character of Wesley Mooch.


By the way, talking of Atlas Shrugged, have you seen the new OECR report?

I agree this is typical Bernard he thinks you can solve every issue one dreams up with a new regulation which is nonsense. The fundament problem is we don’t have sound money and the system is broken as a consequence and on the path to complete failure 

Only one step for it Colin...we need a working group of experts to report on what sound money means...a job for Don?

Yes. By the way I meant in my above post, Big Pappa Gareth Morgan.

Um, yes to Colin, not to Wolly :) Heaven help us another committee Wolly.

Careful Tribeless...Don's outside the tent...and he's had a skinful ...we don't call them committees tribeless...we say working group....

Out of interest Tribeless, in your utopia, if an old man has something I want is anyone going to stop me taking it?

Absolutely.  Protecting people's property rights would be the sole purpose of Government and enforcement agencies.   

Well then that is a system that places supreme advatage with the monopolies and have's.  We already have a system like that, what changes?  Unless I have the ability to take what I want, like it was throughout history, then nothing is going to change for most people.  Instead of being taxed by govt, we will be taxed by the coorporations, even water. 

I'm not sure what the answer is, but lazze fair for those that have, and "if you can swim do so, otherwise drown" for the have nots, is not the answer.

Skudiv, do you honestly believe that the only way to acquire property is to take it from somebody else?  

Do you genuinely regard it as taxation when you buy a good or service from a corporation?

Why should you not pay for water?  It may come out of the sky for free, but it is not costless to get it to come out of your tap in drinkable form.

I know exactly how monopolies operate and they will screw you over every chance they get.  And the end game for this kind of libertairianism is total monoploy power.  It's so obvious, and we already have pleanty of monopolies why would I support enshrining it in law?  I want the power to give everyone a fair go.  Reward effort not ownership from inheritence.  The capitalist system rewards those who have, regardless of how they came by it or what they do with it.  It does not favour innovation, it favours success, but not reasearch to create the success.  Why else is there no viable alternative to fossil fuels even though there is unsurmountable evidence we are running out of them?

Thank you Ms de Meanour

I've said over and over that the libertarian minarchy still is a state, with the rule of law, indeed, one of the few commonalities between libertarians is agreement on policing the non-initiation of force and fraud principle.

Simply put the libertarian says that individuals have rights and responsiblities (that come with those rights); it is the job of the state to protect those rights, but not assume the responsibilities.

I don't mind debating this when I have time, skuldiv, but I wish you would get informed.

minarchy or monarchy?

A libertarian minarchy is the furtherest through from a monarchy, in that it's a constitutional republic. You can even read the constitution for it.

Cheers, had a good read, also looked up minarchy, and I do like the minimal govt stuff.  I am thinking long term though and giving undesputable rights to monopolies will lead to a very bleak future indeed for generations to come.  If you are going to have law of the jungle, you have to have the total law of the jungle.  Survival of the fittest, and most aggressive, and the ability to break apart monopoly power, if not peaceably then warably.  Simply saying whats your is yours, and whats mine is mine, and if you got nothing, I have no use for you, die.  That is no improvement on the current socialist ogliarchy.

Monopolies are made by game playing government regulation: eg, Enron.


But you remain the slave Skuldiv, as that's so obviously what you wish to be, living in the dystopia.

I'll aim for the free utopia, all the same.

"Doesn't take much to realize that the Banking system is a public/private partnership."


Isn't that an agreement whereby profits are privatised and losses are socialised?

Thought so.......

Here is an Idea how about lowering their leverage exposure and moving towards one dollar of capital requirements to shore up worldwide exposures.

I read Atlas Shrugged once.  Then I grew some pubes.

I don't understand the ideology of this website.  Few days ago there was an article about the housing bubble or rort whatever they called it.  Today BH is going on about keep interest rate low. 

WTH, It doesn’t take a rocket scientist to work out that low interest rate will fuel the housing boom

Yes a very ideologically confused site

Bernard.You wash your mouth out with soap and water for suggesting this.

yours faithfully

all bank managers of NZ

If you talk to your colleague Mr Chaston, he will tell you that NZ banks don't have enough capital, so there actually isn't a lot of fat to burn. Those profits, over-sized though they may have been, are gone. The (dividend) cheque is in the mail. 

Now, I suppose you can try to crimp their profit margins going forward, but I don't really want the govt deciding what is/isn't an acceptable profit margin.

What we want is genuine competition on price. Right now there is tacit collusion among the banks. They could cut prices, but then competitors would follow, they would swap customers among each other and ultimately lower the profitability of the industry. So they are content to stand pat and try to win customers with gimmicks and marketing.

If Kiwibank had a capital injection from the govt (as suggested by the Greens I believe) and a mandate to deliver the lowest retail rates possible, subject to covering it's own costs and maintaining sensible LVRs, then that would drive pricing at the margin - and hopefully retail rates lower.

Well if they give out some fat now they will be wanting twice as much back, sorry guy's its just business.

 Meanwhile those banks in Europe have some problems



Europe's banks have £1.5 trillion of toxic assets

Europe's banks must dispose of a pool of toxic assets larger than the entire British economy if they are to return to profitability and meet new capital rules.



They will have to dump considerably more then that, once the PIIGS ratings come inline with reality.  Which will in turn affect the ratings of "core" economies, which obviously will spread further and further.  Only when all government bonds are rated junk will we be able to start over.

fat chance....


The silence has broken - ANZ (Australia) will pass on the full  .25% of interest cut.

I wonder if part of the problem is the drain and expectation of dividends related to bank shares. We saw this in the US where the profits were basically illusory.

Perhaps bank dividends should be 'paid' into a seperate account, where it is held for ~5 years before being transfered to the shareholder. Thus any dividends received today are from the profits of 5 years prior.

This pool of capital would then be available to the bank if there are any issues from prior lending decisions and in case the profits proved to be illusory.

Of course to implement such a scheme you would need to halt the divident stream for 5 years. But if all institutions had to do it there wouldn't be any market disadvantage to a particular participant.

Yeah lets regulate the banks, control everything, encourage the the banks to stop lending, created inbalances everywhere, maybe even bring back SMPs again...until............well until we have1983/84 again when we were effectively bankrupt...the more things change the more some people stay dumb, they're just called politcal/financial commentators (many left wing and uninformed on such things as Govt guarantees) and many are bloggers now

Bollard the banks poodle! Key is their corgi and English is the runt of the litter

Artificaly low interest rates are robbing the savers, I read recently that interest rates so far below the last 10 year average are estimated to cost UK savers about 48 billion pounds a year! That sort of dosh would be helpful in stimulating an economy. Money must have a value greater than the inflation rate of the day or why would you own it?

Thats the problem with state intervention you always end up with an unintended consequence. In this low interest rate environment, which is after all trying to hide the systems structual problems, is helping borrowers at the cost of savers. Goverment guarentee's are protecting lenders and distorting the market for savers. Without the guarentee savers would think be more careful about where they put their money. Do you think the crash of Sth Canturbury Finance would have been as large had it not had the Government Guarentee? I wouldn't mind betting the money poured in after the governemnt got involded. 

How long till people realise the government is the problem not the solution? Why trust a politician or a public servant to decide on the type of future you'll have. They've buggered it up for decades. I have developed my own rule for taking any economist seriously, its, if they forecast the crash of 08, they maybe worth listerning to if they didn't see that coming then they are not worth listerning too. There are plenty of people in the world of economics and finance who did see it coming and so far most of them have forecast whats happening now.

If the MF Global rort as decribed in detail here has validity we need to regulate the regulators.


Great article. How many othere rorts like this are going on out there? It looks like a house of cards on the verge of collapse.

Stephen...  I thought we had already reached the absurd.... but this is extreme.

Can't find the words to express how ugly this is.......

Wonder what impact this might have on mkts...... Are ANY Brokers in the USA to be trusted..??

Cheers  Roelof

FYI all four Australian banks have now passed on the RBA's 25 bps cut on Tuesday after a couple of days of playing chicken.

Read more: http://www.smh.com.au/business/all-four-big-banks-match-rbas-cut-20111208-1okhc.html#ixzz1fyRfdl92

It took more than two days of suspense but all of Australia's big four banks have fallen into line and matched the Reserve Bank's pre-Christmas interest rate cut.

Westpac moved this evening to join the Commonwealth Bank, ANZ and National Australia Bank in lopping their key interest rates for borrowers by 25 basis points.

ANZ was the first of the big four bank out of the blocks with its announcement earlier this afternoon to pass the full rate cut to customers, ending a couple of days of deliberations since the RBA lowered the official cash rate from 4.5 per cent to 4.25 per cent.

And do you honestly expect NZ Banks to move on their margins - I think not. Based on the RBNZ forecasts, one could realistically expect floating rates to soften, but as we all know the banks wont play ball. They will continue with their rhetoric about the state of the world economy and how it will cost more to borrow - so ywe just need to condition ourselves and accept that these savings wont be passed on (really what the banks are saying)

It is nothing but greed - just look at the fAussie banks who reported a 40 Bilion profit for the year

We have to be fair though boofta, I don't know one business in NZ that would willing reduce its margins and profitability for the good of mankind....why should banks, who equally have shareholders, be expected to do the same ? By the way, whats the $40blm (your number) as a return on the hundred of billions they have invested in their business ?  You obviously know the number so as to be able to call it greed...how does it stake up against other profitable businesses ?

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