Those ideologically supportive of the “free market” are trying to coerce banks to stop ditching customers that don’t meet their environmental, social and governance (ESG) commitments, and/or are deemed too financially risky.
During an address at the World Economic Forum in Davos last week, US President Donald Trump had a go at US bank bosses for, in his view, denying banking services to political conservatives.
Australian Liberal Party leader Peter Dutton is pledging to lean on banks to lend to creditworthy businesses that don’t necessarily align with their ESG commitments.
And locally, NZ First MP Shane Jones and Act’s Mark Cameron have taken aim at some banks for moving to exit some businesses involved in coal mining, petrol stations and agriculture.
The extent to which banks are doing so is unclear at this stage, with some (such as BNZ) publicly putting timelines on when they’d like to exit certain sectors and others keeping their language vaguer.
The politicians’ argument is that it’s unfair for banks to take a blanket approach, ditching businesses engaged in perfectly legal activities that support the New Zealand economy.
The issue is pressing. Even if a “dirty” or “risky” business can get a loan from another financier, it still needs a bank account to transact. Its viability hinges on it having a bank account.
Banks, however, argue they can choose who they do business with.
The New Zealand courts have supported this view, backing BNZ in a recent battle to close the accounts associated with the exclusive religious community of Gloriavale, and siding with Kiwibank in its 2016 fight to ditch the money remitter, E-Trans International.
Indeed, assessing credit risk and pricing it accordingly is at the heart of what banks do. Failing to do so could see them collapse.
The pinch – from the perspective of the politicians up in arms – is that they believe banks walking away from some of their high-emitting customers is more about marketing than credit risk.
The politicians have taken aim at banks for making various public commitments to playing their parts in discouraging high-emitting activities and encouraging greener ones.
This is where the irony surfaces.
The politicians typically supportive of leaving businesses to do their thing, are trying to tell banks who to bank.
Does it matter if a bank ditches a mining business because it wants to reduce its exposure to a sunset industry out of concern it will be left with stranded assets, or if the bank is motivated by its customers and shareholders pressuring it to play a role in protecting the environment?
Ultimately, both drivers come down to dollars and cents – maximising profits.
It is at this point one might argue basic banking services (not loans) are a type of infrastructure that should be available to all – and certainly law-abiding businesses.
The Government and Reserve Bank went to great lengths to protect banks during the pandemic, deeming this key to maintaining cashflow and broader economic confidence. They would no doubt do the same in the next crisis.
So then, should banks be obliged to reciprocate by being extra responsible corporate citizens?
Most people would answer, yes.
But then it comes down to your values. Does being a good corporate citizen mean prioritising climate change or economic growth (when the two come into conflict)?
Banks might argue they can’t win. While they’re being called “woke” by some, others accuse them of greenwashing – saying they’re climate-conscious, but continuing to support high-emitting industries.
Banks would also make the case they’re at the coalface (excuse the pun) when it comes to the implementation of various laws and regulations.
For example, the Reserve Bank, under its mandate to maintain financial stability, requires them to make disclosures to ensure they aren’t too exposed to the risks associated with climate change.
New Zealand’s largest companies (including banks) also need to make climate-related disclosures under a new regime supervised by the Financial Markets Authority.
As for the greatest source of contention, banks need to comply with a strict regime to prove they aren’t complicit in money laundering.
This has seen them “blanket derisk”, ditching customers tied up with cryptocurrencies, as well as those involved in the money remittance sector.
In the case of money remitters, banks argue it can be too hard to track where the often small sums of money collected by remitters are coming from and who they’re going to.
Banks also have a part to play enacting sanctions.
They are as heavily regulated as they are powerful – the mix means they’ll inevitably find themselves offside with some.
This shouldn’t be a problem if there is enough competition in the sector to ensure an unhappy, or ditched, customer can find an alternative.
If the market is well-functioning, a viable business, engaged in a legal yet “high-risk” activity, should be able to find a bank to provide it with an account.
As for a loan – debt will always be available at the right price.
The Government should keep trying to improve competition in the banking sector – as difficult and politically unrewarding as this may be – rather than compel banks to align their businesses with ideology of any sort.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
