THE BANK RATE

Hokitika Guardian, 9 July 1927, Page 1

THE BANK RATE

FINANCE MINISTER, INTERVENED.

ACTION' SUSPENDED FOR .MONTHS. AAAEIXIX’GTOX. July 7. That the Alinister of Finance did intervene in connection with the alteration in the hank rate of interest on overdrafts was disclosed to the House to-night during the course of the Hon AA’. Downio Stewart’s speech on the Address-iii-Roply. A statement had been made l>v a. Labour newspaper that he was interested in the Bank of New Zealand and was not in a position to deal impartially with the increase in rates. “Both statements are. inaccurate, been use I am not a shareholder and 1 did intervene,” said Air Stewart. He went on to refer to the argument that because the Government had a majority of directors it could take effective steps to prevent a rise. This provoked nil extremely interesting question as to the power of the Government to interfere with ordinary banking practice. If the view was taken that the Government should have interfered to avoid an increase in the hank rate in the interests of the Dominion then the same question would arise if there wa.s a State Bank. He had to consider how far they could go legitimately without interfering with hanking practice, make representations to the Bank of New Zealand and discuss the matter with them. It had been admitted by the whole of the Press in the Dominion that the disparity between advances and deposits necessitated some action, and everyone knew that the first principle of sound banking was that the banker must protect his depositors, ff advances became excessive then the banker failed in bis duty if he did not take steps to protect his depositors. The hanks were entitled, therefore, to put up deposit rates in order to lessen the gap. What was complained of was the consequential rise in overdraft rates. His view was that the Government having an interest in the Bank of New Zealand and representation on the hoard oi directors was fully entitled to discuss with the hank the general position in the interests of the Dominion without being accused of political interference. If if. represented its views and the, hank’s directors still held to the conviction that the position necessitated a rise in the rate it would he very difficult for him to say wliat further steps the Government should take short of interference with the bank’s directors. Obviously its only course would be to remove its directors or not reappoint them. Tf that course had been adopted it would, declared Air Stewart, have created grave uneasiness in the public mind as to how far political influence would go, and it would be a small step to go further and interfere with actual advances made to individuals, lie emphatically asserted that a sound banking system was imperative in any country, and any suggestion that a State, bank or a semi-State Bank, such as the Bank ot New Zealand, was being dictated to by the Government would create a very dangerous situation. SUGGESTION TO THE BANK.

“Tn point of fact,” continued Mr Stewart “I did discuss thoroughly with the Bank of New Zealand both the questions of deposit rate and overdraft rate. Obviously if they put up the deposit rate it would prejudice Tost Office savings bank deposits, which assist us in gelling cheap money. The overdraft rale I discussed hern use of the fact that farmers and traders were working under grave stress, and I suggested that the burden of increased deposit rates might he borne by the bank and not passed on to the borrower if at all possible. T made it emphatic to the bank Hint with their profits and the amount carried to reserve it would be reasonable if they bore the extra cost of the increased rate paid for deposits, and that if within a reasonable time the increase had not readjusted the position by increase of deposits it would be time enough later on to consider whether they should raise overdraft rates. The effect of a long discussion between the bank and myself was that five or six months elapsed before the banks finally decided they could wait no longer. And one ol the curious features of the complaint made against the banks is that economists who have discussed the position sav they should have done it twelve months before.”

INDEPENDENT ACTION

The Alinister of Finance proceeded to discuss the question of bow tar even so powerful a bank as the Bank ol Xew Zealand could have pursued an independent policy. He believed some years ago in Australia a bank tried to stand against putting up deposits and overdraft rates, but it lost such an enormous amount of deposits timt it could not continue an independent policy. The interdependence of banks in connection with exchange and other matters was so great that the same policy bad to be pursued by all the banks in a country.

A further question arose as to whether Xew Zealand’s banking policy was dictated by 'the economic conditions of another country or whether it was reallv based on Xew Zealand conditions. He wanted to be clear that- action was not being taken to remedy the effects of bad trading in Australia or elsewhere. So far as lie could see the New Zealand liguics made it clear that the problem was a New Zealand one, and be was advised that the Australian banks had brought over large sums .to New Zealand to try to bridge the difficult position in which they found themselves, and that the Bank of New Zealand l ia J cashed in heavily on reserves to meet tlie situation. He realised the irritation of people who saw Hie banks flourishing and paying high dividends in times of adversity. Air Fraser: Nearly COOO.CKIQ profit. Mr '•Stewart : Yes. a very handsome profit but it must be remembered when people quote the fact of the banks paying LTV per <onl dividend that it often is overlooked that money is earned both on then trading capital and their reserves, and it is admitted as sound banking pohev all over the world that heavy rr-orves should be created. I believe it is a fact that the actual amount ot shaieholders’ funds in the bank, and their undivided profits did not earn more than 7 per cent and that the extra amount going to pay dividend came from tile bank’s ordinary trading

operations. The Minister concludes! this survey with the reassuring statement that the raising of rates was showing that advances and deposits were beginning to approach each other. He repeated his opinion that for a time the banks should have tried putting up deposit rates and paid the extra cost them-

selves, but tlie point was raised whether they could have stopped imports. In Uli,, council mil be was in I irn:. :! that representatives of Ameri'.an firms arrived with letters of credit and proceeded to draw on the banks to bring in motor-cars. If the New Zealand banks refused to recognise their sound drafts, it would create a very bad impression if such a report was t insulated. AX OPEN MIX'D. "I have all open mind on H: • question oi a State bank." com-Itided Air Stewart, “and if the nn .'-sity arises for it in Xew Zealand, 1 am prepared to contemplate it. but from what I

see cl New Zealand, the people are better served with the semi-State bank than are the people of Australia. ! do not profess to l,c a banking expert, but, I have no objection, if we find tlie banks arc not doing justice to New Zealand, to opening up the question whether we should have State banking here. However, if ii was started it should I"' tree ,1 political control.