Picking Up Millions

Sun (Auckland), Volume II, Issue 381, 15 June 1928, Page 8

Picking Up Millions

BANK RATE CHECKS SPENDING

Path to Financial Stability

(From Our Resident Reporter.) WELLINGTON. To-day. THE determining cause of the rise in the bank-rate was the intense competition, Government and private, for deposits. This explanation was made at the annual meeting of the Bank of New Zealand by Sir George Elliot, of Auckland, who added that the retention of the high bank-rate, after it had to some extent served its purpose, was in the interests of general financial stability.

“May I,” he said, “emphasise the fact that high rates of interest are not of advantage to tlie banks; borrowing customers may rest assured that their bank directors will be just as pleased as they themselves when the position warrants a reduction.” The competition for deposits had. however, seriously affected the position of banks, ■which were reluctantly compelled in May of last year to raise the deposit rate, not only in order to hold the deposits they already had, but also to stimulate and encourage a fresh supply, and so attain a proper and adequate adjustment of deposits in relation to advances. The natural sequence to a rise in the deposit rate, continued Sir George, is a rise in the advance rate —this, of course, in the pursuit of that perfect balance so much desired, but never attained, by bankers. Perhaps in no country in the world

During the past few months there has been much agitation for a reduction of the bank advance rates, and, in view of the figures I have quoted, titere would appear to be some justification for this agitation. I wou’d point out, however, that to lower rates before the position becomes stabilised might eventually be more upsetting than to keep them for a little longer at the level ruling at present. If, as a result of such lowering, the demand for advances increased unduly, or deposits were reduced, the .same position as existed a year ago would quickly develop, and the same remedy would again require to be applied. Rapid fluctuations in bank rates is not a desirable state of affairs for any country, and it is to avoid such a contingency that the present rates are being maintained somewhat longer than some people think necessary. The hanks are necessarily in the best position to know what the actual present economic and financial position is. and what its future is likely to be; they would be false to their trust if. against their better judgment, they allowed themselves to be stampeded into doing something that would not, in their opinion and with their knowledge, be in the best interest of all concerned. INTEREST RATE NOT FATAL

Dealing again with the interest rate. Sir George said the chief auditor had supplied the following figures showing the rate of interest earned by the Bank of New Zealand on its interestbearing advances in the Dominion for the years ended March 31, 1597, 1907, 1914, 1917 and 1927. (The figures for 1928 have not yet been worked out.) 1897 1907 1914 1917 1927 6.56 5.79 6.00 6.00 6.67

is the taking of deposits, either at call or for extended periods by limited companies and private firms, carried to such an extent as it is in New Zealand. Many of these concerns conduct what is to all intents and purposes a banking business without being compelled by law, as banks are, to keep liquid reserves against their deposits. This state of affairs, apart altogether from the danger it introduces to borrower and lender alike, somewhat upsets the banking position. IMPROVED BY NINE MILLIONS The position just about the time rates were raised a year ago was as follows: Advances by all the banks trading- in New Zealand amounted to £50,801,000 While deposits, free and fixed, amounted to .. .. £45,529,000 The position when the figures were were last published was: Advances £46,070,000 Deposits £49,958,000 It will be seen that in one year the banking position of the Dominion has improved by £9,160,000

It would be seen that the difference between tie highest and lowest point was less than 1 per cejit. Remembering the heavy increase in income tax, salaries and other overhead expenses of the bank between 1907 and 1927, one might recognise that the bank had not passed on to its borrowing customers a proportionate share of its increased operating charges. The desirability of cheap money had indeed to he emphasised; but, in New Zealand at least, it was not the panacea for all financial ills that many writers and public, speakers endeavoured to make out. In London the raising of the bank rate liad no doubt a decidedly depressing influence; but a rise in interest rates had no such devastating effect on a country like New Zealand. It might he inconvenient, but it was not vital.

“After an investigation into the individual losses made by the bank during the year, I am satisfied that by no stretch of imagination could these losses in any single instance be attributed to the payment by the borrower of high interest charges. I will go further and say that, had such borrowers paid 4 per cent, for their financial accommodation instead of 7. the result in every case would have been the same. it may have been one of the subsidiary causes of a man’s financial downfall, hut it was not the primary cause. The primary cause may have been' a, heavy fall in land values, a drop in the price of stock, over-speculation on the eve of a falling market, an unforseen change of conditions, or the acquisition of a greater area of land than was warranted by the owner’s capital.”