Richard Prebble: There are things much worse than profitable banks

OPINION

The politicians want a parliamentary inquiry into the banks’ “excessive profits”. The Finance Minister says he will consider an inquiry by the Commerce Commission.

An economics professor at Auckland University, Robert MacCulloch, says in his blog, we know why banks are so profitable. The banks pay us zero for our money. The banks then electronically deposit the money with the Reserve Bank in an account that pays 4.75 per cent interest. It is no risk and very profitable.

You cannot deposit your money with the Reserve Bank. Also excluded are New Zealand financial institutions that many save with, like credit unions. The account is just for the, almost all Australian-owned, trading banks.

Having an inquiry asking why banks seek the safest most profitable investment is like asking why scorpions sting, it is what they do.

Why have the MPs not asked the Reserve Bank Governor when he appears at their select committee “why is the taxpayer subsidising Australian banks”?

A banking inquiry will divert attention away from those who have caused the excessive bank profits, namely the Reserve Bank and Finance Minister Grant Robertson.

To create a pre-election economic boom Robertson granted the Reserve Bank a taxpayer guarantee to continue printing a billion dollars a week. The result was near-zero interest rates, an economic stimulus, rocketing asset and house prices, an election win and today’s inflation.

It is hard for banks to make a profit when interest rates are zero. The Reserve Bank set up a special facility for the trading banks to encourage banks to continue lending.

Increasing interest rates might seem great news for the banks but it brings its own problems.

At its heart banking is risky. It is borrowing short money from depositors that can be withdrawn at any time, and lending money out long, on loans like 20-year mortgages. Every bank fears that depositors might demand their money back.

The history of banking is the history of capitalism. The gathering of savings by banks and lending it to business funded the modern economy. It is also a history of banking collapses.

It was the failure of hundreds of banks in the US that triggered the Great Depression. The GFC was triggered by the failure of Lehman Brothers bank.

Finance Minister Grant Robertson says he will consider an inquiry by the Commerce Commission into bank profits. Photo / Mark Mitchell

Bank failures have brought down whole countries.

The regulators’ solution is to require banks to have larger reserves. The safest reserves are government bonds that can readily be sold for cash.

When the official cash rate is zero then the interest rates on government bonds are also near zero. As interest rates rise the value of those long-dated low-interest-rate government bonds falls.

This is what caused Silicon Valley Bank, SVB, the 16th largest bank in the US, to fail last week. As US interest rates rose the value of SVB’s long-dated treasury bonds fell. SVB had to do capital raising. This panicked investors and caused a run on the bank.

Our Reserve Bank Governor knows what is far worse than banks making excessive profits, it is banks losing money. He points out the cost of the central bank’s policies is chump change compared to the cost of an economic collapse.

This column warned against money printing, zero interest rates, special loan facilities for banks and allowing banks to deposit money with the Reserve Bank at 4.75 per cent.

As we said at the time, if money printing is so risky that the Reserve Bank needs a taxpayer guarantee, then it is too risky for the country. The guarantee is now costing the Government billions of dollars, money not available for the cyclone recovery.

The best thing would have been never to have printed the money.

Now we must deal with the consequences.

Time will tell whether the Silicon Valley Bank failure is caused by it being a lender to the volatile tech sector or whether it is part of a larger problem.

The US Treasury Secretary is sure the collapse of SVB will not cause other banks to fail. Even if there are further bank failures our trading banks are so well capitalised, they should be able to weather any financial storm.

The security of the banking system has never required the Reserve Bank to pay 4.75 per cent interest on the trading banks’ accounts.

While the Reserve Bank has now closed its special facility and stopped printing money, it has not withdrawn the surplus cash from the economy.

It is why the banks pay an interest rate less than inflation even for long-term deposits. Seeing the value of their retirement savings fall is not chump change for the elderly. It is encouraging retirees to make risky investments to preserve their savings.

We do not need a banking inquiry. We just need the Reserve Bank restore its balance sheet and stop subsidising the Aussie banks.

- Richard Prebble is a former leader of the Act Party and a former member of the Labour Party.