Only the Bits We Like

The left’s pointless inquiry into bank rates has now been released and can be accessed here. It says it is the Report of the Parliamentary Inquiry into Banking but it is not, of course, an official parliamentary inquiry, it is a Labour/Jim’s Vanity Party/Green inquiry and has no official government sanction as far as I am aware. The Herald has, I assume, chosen not to read it as they have apparently printed out Phil Goff’s press release on the report.

Unlike the Herald, I have actually read the report and it has a number of serious flaws. The first is the panel, which consists entirely of left-wing politicians and has only two participants with real-world business experience (Parker and Cosgrove). Admittedly, the lack of other politicians of a business-friendly ilk was a consequence of National and Act wanting no part in this, but it means that the report is inevitably biased. The lack of business experience is a more serious flaw, but inevitable given the scarcity of business talent in Labour’s ranks. Even the Reviewers, John Quiggin and Tim Hazledine, both good economists, have a reputation for siding with socialist viewpoints. It seems unlikely from the start that this report would be fair and balanced.

The second flaw is that the report argues that banks have been making excessive profits, but their data says that the increase in bank profit has been less than the rate of inflation. This does not seem to me to approach the definition of excessive profits. Thus the entire report is based on a complete myth. Banks do not appear to be raking it in by holding up the bank rate while Mr. Bollard lowers the OCR.

The third flaw is probably common to all inquiries such as this but has been exacerbated by the desire to paint the banks as profiteers. That flaw is the quality of some submissions. For instance:

“Finsec commented that people on low incomes can be particularly dependent on credit card debt. Credit card interest rates were exceptionally high, and had dropped little following the large cuts in the OCR. If credit card interest rates had fallen as much as the 90 day bill rate, then the standard credit card rate would be 15.75 per cent rather than over 20 per cent, though even this would be a hardship for some borrowers.”

Finsec appears to have forgotten to observe that the reason for this is that most of the high interest rate on credit card debt is to insure against the high rate of bad debt – a risk that increases substantially during a recession. It is extremely likely that, if Bollard had not lowered the OCR, the interest rate would have risen. And further on bank debt.

“Higher bad debts in the past year. During the 2008/09 financial year the banks had to increase their provision for bad debts from $258 million to $881 million or 16 percent of bank profits. This seems to be correct, although some submissions suggested that bank customers considered that they should not be asked to pay via interest rates for the consequences of some bad lending decisions taken by the banks during the boom. A comment was that other businesses have to carry the financial consequences of their own bad business decisions. [emphasis mine]”

The question should have been asked is did the banks make significantly bad decisions during the boom? All the evidence points to the fact that banks in New Zealand were far more conservative that their overseas counterparts and made few seriously bad decisions. And all businesses attempt to recuperate losses by increasing prices, if they can. Credit card users pay high rates on their debt purely because many do not pay at all.

A fourth flaw in the report is the tendency for the report to make irrelevant comments such as this:

“A rather striking figure cited in several submissions was that the combined profits of the “big four” banks now exceed the combined profits of all other companies listed in the Stock Exchange NZX 50 series.”

This tells us that banks make lots of money. It does not tell us that banks make excessive amounts of money or gouge their customers. The report is peppered with little factoids like this, designed to bolster the overall contention that banks are profiteering, despite their own data suggesting otherwise.

The largest and most glaring flaw is, of course, the complete lack of input from the major banks. As far as I am concerned, this immediately makes the report essentially worthless. Without access to the books of the four major banks, all talk of discrepancies in rates is mere conjecture.

The whole report gives the impression that the authors removed all the bits that put banks in a good light and left in everything that agreed with their primary argument. They used only the bits they liked.

One thing the report does get right is that banks favour housing against small business loans. But this is merely prudent. New Zealand has a number of laws that make property investment a favoured choice, notably it’s tax treatment. Banks respond to this incentive by favouring property because, even in a time when property was loosing value, some of that loss of value was offset by favourable tax treatment.

We want our bankers to be prudent with our investments. The inevitable result of prudence in a risky environment is higher interest rates and larger debt provisions. Labour and the Greens might wish for banks to take on increased risk for sort-term interest relief, but I am betting they would be the first to start complaining when credit dries up. Their answer would involve more regulation which, given their demonstrable lack of understanding in these matters, should fill us all with trepidation. Unintended consequences are just as devastating in economics as they are in medicine.

Related posts: