Integrity in the Bank

Populist Hogwash

The Reserve Bank of New Zealand has moved to restrict speculative lending by banks.  The predictable backlash has seen high dudgeon from the Commentariat which has been speaking up for those poor erstwhile "first home buyers" who are going to be shut out of the market because they cannot marshal the (now) requisite 20 percent deposit.  Populist rubbish.  But it sells newspapers and stirs the pot.

Spare a thought for the Reserve Bank.  It is charged with maintaining the solvency and stability of the New Zealand banking system.  It can only do this if the banks continue to maintain prudent practices with respect to lending.  And therein lies the rub. 

During the global financial crisis--largely precipitated by reckless housing lending in the United States, the UK, and Europe--the New Zealand government was moved to guarantee bank deposits for a time.  Without such a guarantee, it was argued, international creditors would no longer be willing to stump up capital to pay for the country's foreign borrowing.  A precedent was set and a moral hazard was unleashed.  We all learned that in a systemic credit crisis the government would bail out the banks. 

The government is now trying to back off that implicit state guarantee of bank liabilities.
  One key strategy is for the independent Reserve Bank to ensure that bank credit ratios are prudently maintained.  But banks also have learned the underlying lesson.  Why bother to be prudent when in the end the government will bail you out with taxpayers' funds?  After all, banks are required by shareholders to make profits; moreover market share considerations mean that each bank must compete against others to get the punter's business.  Thus, if one bank is requiring a 20 percent deposit for lending on a house purchase, one can hoover up business if one's offer is to require only a 10 percent deposit.  Consequently, New Zealand has seen a rush by some banks into low equity loans, way beyond the constraints of prudence. 

No wonder the Reserve Bank is forcing banks to be less reckless and more prudent.  All the populist rhetoric in the world is worth diddley squat when a systemic banking collapse looms.  And, to be sure, if it were to eventuate those same populists would be screaming about the recklessness and imprudence of  the banks, baying for blood, railing against fat corporate greed, and so forth.

In a more perfect world, senior managers and directors of banks would put prudence ahead of profit.  Nor would there be a moral hazard of an implicit government guarantee of bank deposits.  There would be no need for Reserve Bank preventative intervention.  Full marks to the RB for taking the steps it has.

Will it "cool down" the housing market?  Unlikely.  Will it force banks to be more prudent?  Yes.  That is the real objective--and it is a worthy one. 

As to those first-home buyers who cannot amass the requisite 20 percent deposit in a housing market already showing signs of overheating, we have three pieces of advice.  Firstly, be prepared to purchase a less-than-dream-home in less desirable suburbs.  There are plenty of less expensive homes available, if folk are prepared to compromise.  Secondly, be patient--and in the meantime, keep saving. Thirdly, be willing to consider moving to less expensive cities.  While there may be fewer job opportunities, the competition for positions is much less than the bigger, more popular cities.