On Thursday Reserve Bank Governor Alan Orr revealed what might be the biggest decisions in decades. Governor Orr, in an attempt to strengthen the banking sectors ability to handle a major financial meltdown, announced plans to make banks hold more of their profits relative to the amount of lending that they do.
Yes there is pain. But as the saying goes, you cannot have gain without the pain. So, putting that in context here are the pains (and later I will mention the gains):
- Substantial increases in mortgage rates – possibly up to $300-400 a week if you believe A.N.Z.
- Lending to farmers has decreased significantly on the double digit figures of a few years ago, but with an average mortgage sitting at $3.833 million for farms of all types, even a minor change would hurt
- The total hit to banks may cost around $20 billion
No one I am sure wants New Zealand to have a spasm of collapsing financial institutions like we did in the Global Financial Crisis where 32 separate institutions imploded, wiping out billions of dollars in bank deposits and taxpayer monies. And we certainly don’t want the non-accountability that went with several of the imploding institutions where the people in charge were found to have properties worth several million dollars and living the societal high life made from ill gotten gains. The massive bangs of Fannie May, the Lehman Bros and Freddie Mac going under might not have been felt in New Zealand but anyone following the news would have certainly noticed.
And I do not think New Zealand society is prepared to be radical like Iceland, which which decided to jail its bad bankers and was the first E.U. nation to have a growing economy again post G.F.C.
However I believe that the short term pain will in the longer term be off set by gain. New Zealanders will have more confidence in the banking sector that when financial strife attacks, the banks will be able to cope. The ghosts of the 2007-2009 Global Financial Crisis will be consigned to the history books. Whereas other countries are having or have had painful reconciliation’s with their banking sectors, New Zealand and Australia did quite well – we had none of the following:
- Britain and Ireland went through painful austerity periods
- The United States had to introduce the Frank and Dodd legislation to prevent a repeat of 2007-09, which various Republicans have promised to repeal
- Greece, France, Spain and other E.U. nations suffered considerable internal strife over domestic fiscal policy
And the gains that I mentioned?
- Implosions such as South Canterbury Finance, which took out $1.6 billion of deposits, long term investments and other monies will be less likely – the little man who lost his entire savings overnight in the 2007-09 crisis has less to fear
- Banks credit ratings will hopefully be more secure
- Small banks such as T.S.B., S.B.S. and Co-operative Bank will potentially gain customers
- Ultimately there will be more confidence that money will be better in a bank than under the pillow
That is the theory. The reality going forward is quite possibly different in a country without a flash record of understanding the need for a robust banking framework. The possibility that voters will vote for a party that promises to kick the can down the road for another few years is there. So is the possibility that parties beholden to the banks will vote to undermine, or worse still, completely dial the progress back to where we are today.