Liam Dann: Think before you bash the banks

The Australian Government, surprisingly, have hit the banks with more tax. Picture / 123RF

Kiwi corporate high flyer Ralph Norris - who headed up ASB's parent the Commonwealth Bank of Australia from 2005 to 2011 - once said: "There is only one thing worse than a profitable bank and that's an unprofitable one."

He was talking about the damage failed banks did to economies in Europe, the UK and US during the financial crisis.

Norris did also have his effigy hung in the streets and attacked by mobs of angry Australians after raising interest rates in 2010 - albeit as part of a TV station's publicity stunt.

They do get a lot more het up about bank profits across the ditch.

Still, it was a surprise last week to see an allegedly centre-right Aussie Government tapping into this ill feeling with its new tax on bank profits.

Australian Treasurer Scott Morrison introduced a 0.06 per cent levy on Australia's five biggest banks - Westpac, ANZ, Commonwealth Bank of Australia, National Australia Bank and Macquarie Group - equating to A$6.2 billion ($6.65b) across the next four years.

It was pretty cynical move by a Government desperately looking for revenue to get back into surplus.

They have looked around and assessed, quite correctly, that there were won't be any mass outpouring of sympathy for the banks.

They must also know, though, that much of the money will still come from the pockets of taxpayers.

Either the banks will pass these costs on to customers through higher fees and higher margins on interest rates, or they will have to take a hit on earnings.

In Australia, where they have compulsory superannuation, most people have savings invested with the ASX-listed banks.

Finance Minister Steven Joyce says there are no plans to follow suit here.

That's hardly surprising. Our centre-right Government isn't short of cash and is not a fan of new taxes.

But Opposition parties will be looking closely at the policy. They can make the case a tax on excessive bank profits simply brings us into line with Australia.

Our latest round of bank results showed returns aren't quite so excessive on this side of the Tasman. But the banks are still making something like $4.3b in annual profits and, as most of it goes to foreign shareholders, it represents a considerable drain on our current account.

Half-year results showed ANZ did the best, with a 14 per cent lift in profit after making gains on costs. Westpac's result was flat and BNZ's profits were down slightly.

If you like delicious independent craft beers, neighbourhood cafes, local retailers and owning a home , it is worth remembering banks make a lot of really cool stuff possible.

All three saw their margins squeezed.

There is a sense we are coming to the end of a cycle in New Zealand.

The great lending boom that helped fuel the housing market in the past eight years is over. The banks have played ball with the Reserve Bank - embracing loan value ratio restrictions and tightening their own internal lending criteria.

The International Monetary Fund, in its latest report on New Zealand, argued we should further tighten capital requirements for the banks.

The Reserve Bank will pay attention to that but it is probably wary of over regulating.

You can remove risk from the economy - and profit from the banks - by requiring them to hold a higher ratio of capital, so they have less money to lend.

But the New Zealand economy might then be a less dynamic place.

It would be a harder place to start a business and those already locked out of the housing market would find it even tougher.

Many New Zealanders still recall the tough business environment after the BNZ meltdown and bailout in 1990.

Bank bashing is easy.

If you think capitalism is a horrible thing that causes more harm than good, it's also an entirely reasonable position.

There's no doubt they are enablers of our addiction to the powerful drug we call money.

Illustration / Rod Emmerson

But if you like delicious independent craft beers, neighbourhood cafes, local retailers and owning a home you don't have enough money to buy, it is worth remembering banks make a lot of really cool stuff possible in this world.

Do they make too much money?

Do they pay their bosses too much?

Are they too ruthless with borrowers when they find themselves in financial strife?

Have they recklessly fuelled a housing bubble?

These are valid questions. At various times and to differing degrees they can be the case.

But these things are difficult to regulate against if you also want to maintain a strong banking sector and a dynamic economy where it is good to do business.

I'd argue our banks are safely in the black when we look at the net result of any cost benefit analysis.

I know plenty of people disagree with me - many will have left disparaging comments on the Herald Facebook page before they even read up to here.

Banks also have a social contract with the populations they service.

In this country they are implicitly guaranteed by the taxpayer. They are too big to fail. So the onus is on them to ensure they operate fairly and openly.

They need to carry the public with them.

As interest rates start to rise and pressure goes on mortgage holders, events in Australia this week have provided local banks with a timely reminder.