Interest rates and banks

Written By: - Date published: 9:43 am, March 16th, 2016 - 185 comments
Categories: Andrew Little, capitalism, economy - Tags: , , , ,

Yesterday Andrew Little criticised the banks’ failure to pass on the cut in Official Cash Rate (OCR) to we the people via mortgage / interest rate cuts:

Little to banks: Pass on rate cuts or suffer consequences

Opposition leader Andrew Little says Labour will consider forcing banks to pass on cuts in the Official Cash Rate (OCR) to customers if they did not respond to a “stiff-arming”.

Mr Little’s comments come after several of the main banks only cut their interest rates on loans by a portion of last week’s 0.25 point cut, down to 2.25 per cent.

Mr Little said if Labour was in government it would start with “pretty serious talking” with the banks.
…
If the Government’s expectation was for banks to pass on drops in the OCR to lenders, it should make that very clear “and be very firm about it and should remind banks that it does have powers the banks don’t have”.

Naturally the political right went ballistic at the very idea, with broadsides from Key and English, and the usual professional liars completely misrepresenting what Little had said.

The simplistic form of what Little suggested might be too blunt a tool, but some version of it doesn’t seem unwarranted. In fact, it should be part of a broader investigation into whether banks are blatantly ripping of NZ. Here’s some headlines for context.

From 2013: NZ’s big banks record $3.5b profit: “New Zealand’s big four banks collectively made more than $3.5 billion in the last year in another record year for the sector…”

From 2014: Banks’ profits explode as bad debts reduce: “Expert says sector’s ballooning rate of profit growth can’t be sustained for another year….”

From 2015: NZ’s big banks continue record run with $1.69b three-month profit and ASB, ANZ, BNZ and Westpac rake in $4.59 billion of profits: “All four major Australian-owned banks have continued record runs of profitability, with a combined haul of $4.59 billion. The staggering figure represents more than $1000 for every person in New Zealand…”

Or as Andrew Little put it (same piece as above):

He said the banking sector had been very profitably through good and bad. “I think, frankly, they can do better for New Zealand.”

Quite.

Updated with a bonus headline from RNZ this morning:

Why are credit card rates still so high?

Banks are being criticised for keeping credit card interest rates at nearly 20 percent despite general interest rates being at their lowest in decades.

Last week, the Reserve Bank cut the Official Cash Rate (OCR) to 2.25 percent. Floating mortgage rates with the main banks are now below 6 percent, with some fixed rate mortgages just over 4 percent. Credit card rates, however, have hovered around the 20 percent mark for several years. …

Good question, don’t you think?

185 comments on “Interest rates and banks ”

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  1. adam 1
    16 March 2016 at 9:47 am

    Reforming capitalism is like owning a pet shark, you can’t moan when they bite your face off.

    • vto 1.1
      16 March 2016 at 10:08 am

      that’s stupid

    • North 1.2
      16 March 2016 at 10:17 am

      Excellent analogy Adam. And Key reacts vacuously (if we’re kind) and wilfully dishonestly if we’re realistic – from Trev’s Herald article – “What he’s basically saying is when the Reverse Bank puts the base rate up, he would be forcing home owners to pay a higher interest rate.”

      How does that follow ? In any honest mind how does that follow ?

    • Nick Morris 1.3
      16 March 2016 at 1:20 pm

      Analogies are the lowest form of proof. Reforming capitalism is like owning a pet lamb. Your are hugely surprised when it bites your face off. Perfectly true and perfectly stupid and imperfectly proving my point.

  2. Colonial Viper 2
    16 March 2016 at 10:19 am

    Some gutsier than expected comments from Little against the banks.

    Given that the banks and the financial and money markets that they control are as powerful as the Government.

    The banks can cause a recession/economic boom very easily, via changes in their lending practices.

    I think an FTT is the way to go, as well as strengthening KiwiBank as a low profit, public service banker.

    • te reo putake 2.1
      16 March 2016 at 10:47 am

      Not that surprising for those of us who know Andrew Little, CV. I think you’ll find that he will keep coming out swinging.

      Andrew’s playing a pretty solid game. First get the party on message, disciplined and optimistic. Second, hit National where they’re weak. Third, present the voters a clear alternative at election time.

      Little is here to stay. I suspect you and I know that Key’s best bet now is an early election. If he limps on to full term, he will lose. And John Key doesn’t like losing. It’s just a question of what issue he goes early on. There has to be a credible reason to call a snap election. If not, he faces the Muldoon scenario.

      Just as an alternative, what happens if Key tells English, Joyce and the rest of the blue team brains trust that he wants to go to the polls early and they say no way.

      Resignation?

      • cogito 2.1.1
        16 March 2016 at 11:09 am

        “Second, hit National where they’re weak”

        Yes, but challenging the ultimate bwanker on his specialist subject……..?

      • Jenny Kirk 2.1.2
        16 March 2016 at 4:15 pm

        + 100% Te Reo Putake. Andrew is doing what he set out to do …. and he’s starting to get there ….. so of course the Nats and rightwingers are going to react !

    • gsays 2.2
      16 March 2016 at 2:29 pm

      Here, here CV.
      FTT and the state withdraws from it’s arrangement with westpac and banks with kiwi bank.

      The FTT is set at a level to pay $400 a week ubi and it replaces gst and income tax.

    • Amanda Atkinson 2.3
      16 March 2016 at 3:58 pm

      It’s a stupid comment clearly indicating Little doesn’t have a clue. The dirty rotten filthy corrupt banking system is at the heart of what is wrong with the world, but legislating interest rate decreases is just stupid. It’s a fair question to ask what he would do if interest rates were going up, and the banks were slow to pass on the increases. Same as the petrol debate. More than that though, making this an issue just shows what a numpty Little is. It also shows how Key is part of the problem, because he damn well knows the truth, but won’t play a part in NZ leading the way to fix it. The corrupt banking system is destroying the worlds economy, but it is nothing to do with left and right. Indeed, it was left wing, socialist bail outs for these crooks, that contributed to the moral hazard we are now seeing. That is at the heart of all things wrong now. Cheap money, whether it’s artificially low interest rates, socialistic style bail outs, or money printing, all create moral hazard. That is, governments, businesses, and ordinary people unafraid to get into debt, and that causes massive asset bubbles, like housing in Auckland. And Little wants interest rates even lower? What a tosser, not a clue. I don’t know what is worse, Key knowing the real problem and doing nothing, or Little not knowing. Either way, there is big hard lesson on it’s way. The 08 GFC was just the warm up!

      • McFlock 2.3.1
        16 March 2016 at 4:03 pm

        I wasn’t aware that banks failing to increase rates at the earliest opportunity was a thing. If there is evidence of it, I’m happy to stand corrected.

        • Amanda Atkinson 2.3.1.1
          16 March 2016 at 4:06 pm

          exactly, that IS the point. You’re about as wise as Little. That you think that whether they do pass on the increases or decreases is THE issue, 100% demonstrates my point.

          • McFlock 2.3.1.1.1
            16 March 2016 at 4:11 pm

            So banks apply the same lag to increasing interest rates in line with the OCR as they apply to decreasing interest rates when the OCR falls?

            Evidence pls.

            Your (and key’s) argument seems to be that the OCR is not just a blunt tool, but also a completely ineffectual economic tool that banks fail to respond to in a timely way.

            Surely, at worst, Little’s proposal would ensure that the missives from the Governor of the Reserve Bank actually manages to have an effect on the economy?

            • Amanda Atkinson 2.3.1.1.1.1
              16 March 2016 at 4:17 pm

              now you’re just being deliberately beligerent, or if you really think that a few days or weeks delay in decreases of interest rates, is an issue, compared to the state sponsored world wide corruption of this industry, please, stop wasting my time. Read ALL of my post, that’s the real problem we are facing.

              • McFlock …
                16 March 2016 at 4:25 pm

                I have read all of your comment.

                Paragraphs might be useful.

                And yes, price inelasticity when it comes to reflecting the desired outcomes of OCR changes is a problem for the individuals concerned as well as for the application of the OCR as an economic tool.

            • International Rescue 2.3.1.1.1.2
              16 March 2016 at 6:34 pm

              “So banks apply the same lag to increasing interest rates in line with the OCR as they apply to decreasing interest rates when the OCR falls? Evidence pls.”

              Yes. http://www.nbr.co.nz/sites/default/files/ocr-graph-16.jpg.

              My pleasure.

          • McFlock 2.3.1.1.2
            16 March 2016 at 4:20 pm

            For example, a quick google finds articles about banks only cutting their rate by 20points after a 25pt OCR cut, and yet older articles talk about banks raising their rates by as much as 50 points following a rise of only 25 points in the OCR.

            If anything, it looks like little’s proposal could well actually slow mortgage rate increases when the OCR eventually rises again.

            • Amanda Atkinson 2.3.1.1.2.1
              16 March 2016 at 4:29 pm

              yeah well, that just shows you how much you know about banking and economics. So you’re advocating for low interest rates, you prefer an economy built on low interest rates, moral hazard, huge debt, low savings rates, and growth by massive debt ridden consumer consumption. Try the opposite. Higher interest rates, high savings rates, no moral hazard, careful lending and borrowing, growth from investment, not debt fueled consumption, I know which world I’d rather live in. Key and his banking mates, won’t fix it, and Little (and you) can’t even see that it’s happening, so we’ll just have to wait for GFC round 2.

              • McFlock …
                16 March 2016 at 4:35 pm

                Nope.

                Read it again carefully.

                Little, and I, are merely suggesting that bank retail lending rates should promptly reflect changes in the OCR.

                This will make the OCR a more effective economic management tool.

                Your statement “It’s a fair question to ask what he would do if interest rates were going up, and the banks were slow to pass on the increases” appears to be referring to a situation that does not exist. Banks aren’t just fast to pass on increases, they use OCR increases as an excuse to inflate their rates beyond the change in the OCR.

                • Amanda Atkinson …
                  16 March 2016 at 4:52 pm

                  Nope. You’re focusing on the small stuff. Gee whizz. You just cannot let it go can you? That’s my whole point. There is a much bigger problem, systematic corruption and moral hazard that no one is discussing. Key won’t address, Little (and you) can’t even see that it’s there.

                  • McFlock …
                    16 March 2016 at 8:56 pm

                    “Corruption” and “moral hazard” are completely different problems.

                    Given your complete failure at understanding the problem that is being talked about, I’m not sure I’m overly worried.

                    How about you take the time to write a comment, with paragraphs and everything, consisting of what you would prefer Litte to be proposing?

              • Mike S …
                17 March 2016 at 2:24 am

                “yeah well, that just shows you how much you know about banking and economics.”

                Growth doesn’t come from savings and investment, it comes from consumption.

            • Gosman 2.3.1.1.2.2
              16 March 2016 at 5:58 pm

              How do banks make the majority of their money Mcflock?

              • McFlock …
                16 March 2016 at 8:51 pm

                Oh, generalised fraud and larceny, I guess. /sarc

                How about you make your point?

                • Gosman …
                  17 March 2016 at 3:55 am

                  See below. It is the margin between interest rates that is important in determining bank profitability not the rate they charge for lending alone.

                  • McFlock …
                    17 March 2016 at 10:59 am

                    “see below”. Seriously? You do realise we’re at the top of the thread, right?

                    But as for your stating of the bleeding obvious, waffling about margins is irrelevant to the discussion about the relative elasticity when those margins increase vs when they decrease.

    • Jones 2.4
      16 March 2016 at 9:33 pm

      And they wouldn’t think twice about crashing the economy if there were any moves to curtail the way they do business.

    • Mike S 2.5
      17 March 2016 at 2:19 am

      Kiwibank should be zero profit and only collect enough revenue to cover expenses. There’s no need for a government owned bank to make a profit.

    • Henry Filth 2.6
      17 March 2016 at 5:55 am

      It rather depends what is defined as a financial transaction. Perhaps we will all be surprised by the final definition!

  3. tsmithfield 3
    16 March 2016 at 10:24 am

    Price controls cause shortages and inefficient use of resources:

    http://fee.org/articles/hurricane-hugo-price-controls-hinder-recovery/

    If banks are unable to price adequately for risk due to government controls on interest rates, then, they will be less willing to lend money, which is exactly the opposite of what is required at the moment.

    A benefit of banks being profitable is that they will be much stronger and less likely to fail. I would rather have profitable banks than having banks on the verge of failure requiring tax-payer bail-outs.

    • Colonial Viper 3.1
      16 March 2016 at 10:28 am

      You’re so full of shit.

      More like price controls prevent gauging of low power consumers currently being stolen from.

      The banks are ripping off NZ to the tune of $5B per year through excessive charges and here you are making excuses for them.

      Here’s a clue: if a bank doesn’t want to do business in NZ because a billion dollars a year profit is too little for them, they can fuck off and we can distribute their accounts to the ones who do.

      This is also more reason for the role of KiwiBank to be bolstered, as the private sector banks love to yank back their umbrella from you just as it starts raining.

      • tinfoilhat 3.1.1
        16 March 2016 at 10:34 am

        “Here’s a clue: if a bank doesn’t want to do business in NZ because a billion dollars a year profit is too little for them, they can fuck off and we can distribute their accounts to the ones who do.”

        Indeed, isn’t is strange that a little country of 5 million at the end of the earth has so many international banks keen to do business here……..business must be good if you’re a bank otherwise I’m sure they’d find richer pickings elsewhere.

      • Crashcart 3.1.2
        16 March 2016 at 10:38 am

        I don’t know why the government don’t use Kiwi Bank to correct the market. Have Kiwi bank set its mortgage rates much more competitively and force other banks to come down to it by subsidising any break fee’s that people would be charged to swap to Kiwi bank mortgages.

        Do the same on credit cards and bank fees.

        You no longer have to set off right wing hysteria with talk of interest rate controls and the other banks will be forced to lower their own prices down to a realistic level or loose customers.

        • Colonial Viper 3.1.2.1
          16 March 2016 at 10:40 am

          This Government is like the previous Government: using SOEs like KiwiBank to suck money out of the country in order to try and prop up their budget surplus.

          • Crashcart 3.1.2.1.1
            16 March 2016 at 10:46 am

            Doesn’t stop Labour stating they would do this.

            • Colonial Viper 3.1.2.1.1.1
              16 March 2016 at 10:49 am

              No it doesn’t. But Labour 5 used power companies like Genesis as cash cows instead of reducing power bills for NZers. That’s the mindset of these rulers.

              And because Mighty River Power and Genesis were so commercially profitable under Labour, they became prime privatisation targets for National.

              See how it works.

              • saveNZ …
                16 March 2016 at 11:13 am

                @ CV agree that Labour did not cut power bills, but National are the real evil, getting the country into massive debt, telling the SOE’s like Solid Energy to take on more debt which sent them into bankruptcy, selling off the state assets etc….

                National definitely are winning the most stupid, least financial government award.

                Banks have also been exposed to more fraud in their greediness. They were so keen to take those so called ‘new customers’ that they have not realised that some of them the paper work is fictitious, the assets are over valued and it is hard to get someone to make payments when they don’t actually live in NZ.

                Fraud was also a big factor in the US financial crisis. People just making up the paperwork so they could get commissions and loans through.

                Maybe banks should have focused on giving better deals to their existing customers who they knew were genuine…

    • saveNZ 3.2
      16 March 2016 at 10:36 am

      @tsmithfield – I think with 3.5bn in profits banks should not have to worry unless they have exposed themselves to stupid swaps and financial products that are ponzi schemes.

      More financial regulation is the way to avoid that!

      • tsmithfield 3.2.1
        16 March 2016 at 10:51 am

        It seems that you and other commenters above are saying that the profit that banks make is a really big number, so it must be too much. However, it is important to consider the return on assets.

        Bank profits represent less than a 1% return on assets: http://www.stuff.co.nz/business/money/9242351/Bank-profits-back-to-pre-crisis-levels

        From the article:

        “The problem with the banks is the profit as a raw number is enormous – $1 billion a quarter, and that’s quite astounding,” he said.

        But he said, if you looked at a return on assets compared to a large listed company, you would find the large listed company earning profits of six to seven times their assets, while banks earned roughly 1 per cent return on assets, which dipped to about 0.8 per cent after the global financial crisis struck..

        That is an incredibly low return on assets compared to what most businesses would expect to be making. Generally, a business would want to make considerably better than what they could earn if their assets were cashed up and earning interest.

        • Colonial Viper 3.2.1.1
          16 March 2016 at 10:54 am

          Fuck off tsmithfield, these “bank assets” aren’t factories and machinery, they are fucking mortgages held over the lives of NZers and NZ farmers.

          And if the banks don’t think $5B a year extracted out of NZ is very much money they can leave and we can have NZ banks take that profit instead.

          After all, it’s not very much money according to you eh, I wonder why these big foreign banks would even bother..

          • tsmithfield 3.2.1.1.1
            16 March 2016 at 11:33 am

            The assets still pose a risk to the banks. Much has been made of this in recent times with respect to decreasing values of dairy farms and the impact that could have on the banks. So, profit needs to account for those risks.

            In fact, the risk to banks has been highlighted on this site:

            http://thestandard.org.nz/rb-snaps-awake-jolts-markets/

            From the article:

            The RB has “stress tested” banks on the basis that the dairy price slump holds for three more years.
            The full results will be released next week, but under that “pretty tough” scenario he expects dairy land prices to fall around 40 percent.

            Given the sector owes banks around $40 billion, and that that debt is mostly secured on the land, that is going to cause banks pain.

            So, the banks need to generate sufficient profits to mitigate these risks. In light of the quote above, perhaps the bank profits don’t seem excessive. In fact, they could be seen as very light.

            The left often seem to see “profit” as a dirty word. I see it as the premium required to justify the risk taken.

            • Crashcart 3.2.1.1.1.1
              16 March 2016 at 11:45 am

              I bet CV who runs his own business see’s profit as dirty. Great logic there TSmith. However when we are talking about assets that can be created out of nothing (go look up fractional reserve banking) I think you are understating the return on assets.

              If I could go and lend a guy $100 when I really only have $10 and expect to keep all of the $101 in return did I make $1 on the loan or did I make $91.

              • tsmithfield …
                16 March 2016 at 12:14 pm

                Yes, I understand this. It traces back to the goldsmiths who used to issue receipts for gold held and would lend out the excess and retain a reserve to cover likely withdrawals. http://www.yourarticlelibrary.com/banking/banking-the-evolution-origin-and-growth-of-banking/10998/

                However, the problem arises when the draw on reserves is higher than the reserves held or if a devaluation of the underlying asset created by borrowing results in a loss greater than the reserves held by the bank. This is the situation that could potentially arise with a devaluing of dairy farms by 40%.

                Hence the need for banks to make adequate profits to cover their risks.

                • Colonial Viper …
                  16 March 2016 at 12:21 pm

                  BULLSHIT

                  Unless you can demonstrate that the banks have been putting their excess profits into much larger loan loss reserves.

                  (Which I bet they have not).

                  By the way, the Reserve Bank will provide all the liquidity that a bank needs.

                  Odd thing though is that banks will not provide farmers with all the liquidity that the farmers need.

                  Again – the banks are in a low risk protected position and it is the farmers bearing all the risks to themselves and their families.

                  You really are a deplorable bankster shill.

                • Graeme …
                  16 March 2016 at 1:38 pm

                  Well there wouldn’t be any risk if the banks hadn’t been lending based on expectations of $8.40 / kg. To then turn around and expect their customers to shoulder the risks they took is just a bit on the nose.

                  If I went to a bank with similar logic in a loan application I’d be shown the door.

                  • Draco T Bastard …
                    16 March 2016 at 4:16 pm

                    To then turn around and expect their customers to shoulder the risks they took is just a bit on the nose.

                    Yep. That’s what I’ve been thinking as well. Time to make the ‘risk’ that the financiers say that they take to actually land on the financiers and not those doing the actual work.

            • Colonial Viper 3.2.1.1.1.2
              16 March 2016 at 12:11 pm

              So, profit needs to account for those risks.

              Nonsense. The banks are at no real risk.

              They have ensured that they are the protected party. It’s the farmers who carry all the risk.

              No bank is going out of business because of dairy farm mortgages. But plenty of dairy farmers are going out of business.

              Again, the banks have ensured that they are protected in all instances. The risk is all on the farmer.

              Unless you can show me that the banks have been putting away those megaprofits as large loan loss reserves to account for the “risk” you say they have undertaken.

              Instead of paying those billion dollar profits out to line the pockets of their shareholders.

              • tsmithfield …
                16 March 2016 at 12:22 pm

                You clearly didn’t pay much attention to the fate of banks in the GFC.

                No-one forced farmers to borrow money. If farmers priced their returns based on the highs of several years ago they are clearly idiots who deserve to go under.

                Prices for commodities are by nature highly volitile. This is not the first time this scenario has played out for milk, and it will again in the future.

                Therefore, prudent management requires a business model that is sustainable in the hard times as well as the good times. Banks shouldn’t have to support fundamentally unviable businesses indefinitely.

                • Colonial Viper …
                  16 March 2016 at 12:26 pm

                  No-one forced farmers to borrow money. If farmers priced their returns based on the highs of several years ago they are clearly idiots who deserve to go under.

                  Prices for commodities are by nature highly volitile.

                  Why are you blaming the farmers for the banks excessive lending?

                  Did the farmers bring shotguns into the banks offices and force the bank loan managers to sign the loan documents?

                  Farmers are expert at farming. Bankers are – supposedly – expert at finance, markets and lending.

                  So how come these expert bankers did not realise that commodity markets are volatile?

                  Basically you are here blaming the farmers while exonerating the imprudent, loose lending of the banks – who are supposed to be the financial experts.

                  • The Chairman …
                    16 March 2016 at 12:36 pm

                    “Did the farmers bring shotguns into the banks offices and force the bank loan managers to sign the loan documents?”

                    It comes down to banking pay structures that reward employees for the loans they issue.

                    A bank employee can be long gone before a loan goes bad.

                  • tsmithfield …
                    16 March 2016 at 12:50 pm

                    The bankers didn’t have a shotgun forcing farmers to sign loan documents either.

                    Banks price their risk into the premium of the loan. They can get that wrong too, resulting in loans going under water meaning they lose money if assets need to be cashed up.

                    You need to grasp the concept that risk is inherent in any business activity whether it be banking, farming or something else. It is how that risk is managed that is critical.

                    • pat …
                      16 March 2016 at 2:21 pm

                      ‘You need to grasp the concept that risk is inherent in any business activity whether it be banking, farming or something else. It is how that risk is managed that is critical.”

                      That is almost true…..the risk decisions are made by those with no financial interest in the outcome due to the bonus structure in modern banking with its perverse incentive schemes that reward short term targets and in the case of senior executives reward irrespective of result…all with the knowledge that the downside risk will almost invariably be socialized should it come to pass, as evidenced by the GFC.

                      and….”The bankers didn’t have a shotgun forcing farmers to sign loan documents either.’

                      am sure you understand the term “Hobson’s choice”….there were certainly “pressures” applied by the banks to join the white-gold rush.

                      ‘Banks price their risk into the premium of the loan. They can get that wrong too, resulting in loans going under water meaning they lose money if assets need to be cashed up.”

                      that is theoretically true, however the reality is that the price will have to drop a very long way (and before the bulk of the debt recovery) before the banks lose out on most forced sales with the debt equity ratios required by the banks….andthose loses, should they occur can be offset against future profits.

                    • Mike S …
                      17 March 2016 at 2:43 am

                      “… resulting in loans going under water meaning they lose money if assets need to be cashed up….”

                      How can they lose something they never even had in the first place?

                      They don’t lose money, they just make less money.

                • The Chairman …
                  16 March 2016 at 12:31 pm

                  “No-one forced farmers to borrow money. If farmers priced their returns based on the highs of several years ago they are clearly idiots…”

                  If banks financed farmers on returns based on the highs of several years ago, then clearly they are just as culpable.

                  • Colonial Viper …
                    16 March 2016 at 12:42 pm

                    More so in my view because the banks are supposed to be the financial and market experts.

                    • The Chairman …
                      16 March 2016 at 12:47 pm

                      Indeed.

                    • Sacha …
                      16 March 2016 at 3:58 pm

                      NZ banks mostly assess residential housing investments, so they are weak at accurately assessing the likely risks and returns in other asset classes like farms and businesses. Hence they tend to refuse loans or up the interest or caveats. Another structural problem with our slanted economy.

                    • Draco T Bastard …
                      16 March 2016 at 4:27 pm

                      NZ banks mostly assess residential housing investments, so they are weak at accurately assessing the likely risks and returns in other asset classes like farms and businesses.

                      Actually, research has shown that no one’s good at picking financial winners and that tossing a coin is just as effective as hiring the ‘experts’ in banks and other financial institutions but a hell of a lot cheaper.

                    • Henry Filth …
                      17 March 2016 at 5:59 am

                      About every decade, we get (and pay for) a reminder that the New Zealand finance industry is not very good at what it does (and gets well paid for).

                • Draco T Bastard …
                  16 March 2016 at 4:22 pm

                  Therefore, prudent management requires a business model that is sustainable in the hard times as well as the good times.

                  Hang on, isn’t chasing huge profits the name of the game in capitalism?

                  So, the farmers were doing what good capitalists are supposed to do and so were the banks but now you’re saying that the banks shouldn’t have to wear the risk that they took?

                  What sort of capitalism is this where the risks get rewarded and the potential losses are stuck on someone else?

              • The Chairman …
                16 March 2016 at 1:07 pm

                “But plenty of dairy farmers are going out of business.”

                Don’t overlook the wider knock on effect, a number of SME’s will also feel the pain.

                • McFlock …
                  16 March 2016 at 1:25 pm

                  All through the regions.

                  That’s the real crisis – it’s another kick in the nuts for small towns over much of the country.

                  Yes, dairy farmers mismanaged by jumping into the white gold rush. But the government sat back and ignored the problem, even when it was clear that global competition was going to really hit dairy prices. So now we have a situation where thousands can’t afford to live in our cities, but there’s no jobs in the regions so they’re fucked there as well.

                • Sacha …
                  16 March 2016 at 4:01 pm

                  Quite. Labour also need to paint their advocacy as protecting the interests of provincial suppliers, small town businesses, and their employees.

            • Colonial Viper 3.2.1.1.1.3
              16 March 2016 at 12:16 pm

              The left often seem to see “profit” as a dirty word. I see it as the premium required to justify the risk taken.

              You bankster shill.

              If the banks don’t like the risks they shouldn’t have lent excessively.

              And if they don’t think billions in profit are enough, they should leave our shores and let NZ banks take their business.

              • tsmithfield …
                16 March 2016 at 12:24 pm

                You are contradicting yourself. In your previous post you claimed that banks aren’t at any real risk. Now you are saying that if they don’t like the risk (which you previously claimed wasn’t real) they shouldn’t be lending so much money.

                If you don’t think they should be lending so much money, then would you agree that banks should be mitigating their risks by calling up loans on unviable farms?

                • Colonial Viper …
                  16 March 2016 at 12:29 pm

                  What risk?

                  Are there any bankers families who are going hungry because of the dairy downturn?

                  Are there any bankers killing themselves because of the dairy downturn?

                  All the real risk is on the farmers.

                  The banks are in a fully protected position. No banker is going to be losing their home in this dairy crash.

                  Plenty of farming families and farm worker families will be losing theirs.

                  Who is carrying the real risk again, tsmithfield, bankster shill?

                  • tsmithfield …
                    16 March 2016 at 12:43 pm

                    You are conflating banks with bankers. There is a difference. If a bank collapses then a banker could well lose his home, depending on the circumstance.

                    Do some research into the effect of dramatic falls in the value of secured assets on the equity position of banks. Then you will understand the reason banks are at risk as has played out frequently during the GFC.

                    As mentioned, no-one forced farmers to take risks in getting involved with dairy. It is like any other business. Risks need to be managed and profits need to justify the risks. For whatever reason, farmers that get into trouble haven’t adequately managed their risks or generated enough profit.

                    The real problem is oversupply of milk. Propping up unviable farms won’t solve this situation. It will only result in the status quo continuing for longer eventually putting more farms at risk.

                    What needs to happen is that the production of milk needs to balance with the demand at a level that farms can be viable. That may mean that the unviable farms have to fail for the good of the rest of the industry.

                    I have been concerned for sometime now about how NZ has had too much concentration in dairy and the effect that could have in a down-turn.

                    • The Chairman …
                      16 March 2016 at 12:54 pm

                      “If a bank collapses then a banker could well lose his home, depending on the circumstance”.

                      You are conflating a bankers personal financial situation with the banks.

                      If a bank collapses, creditors can’t claim a bankers home for issuing a bad loan.

                    • The Chairman …
                      16 March 2016 at 12:57 pm

                      “Businesses can elect to retain earnings in the business if they wish rather than pay dividends.”

                      Yes, but failing to pay dividends will negatively impact on their share value. Investors want returns.

                    • The Chairman …
                      16 March 2016 at 1:25 pm

                      If earnings are retained to cover bad loans, the pie won’t become larger.

                    • The Chairman …
                      16 March 2016 at 2:12 pm

                      “The pie will be larger than it would have been if earnings weren’t retained to cover bad loans.”

                      Depends on what earrings are retained for and whether that produces higher returns going forward.

                      Moreover, forcing investors to wait for their return will effectively cost them money. A number will withdraw and invest elsewhere.

                  • The Chairman …
                    16 March 2016 at 12:45 pm

                    I love how banks throw around the old line that a profitable banking sector is good, as if profits (once paid out to shareholders) are then going to support the bank in hard times. That money is long gone. Hence, the open bank resolution.

                    • tsmithfield …
                      16 March 2016 at 12:53 pm

                      Paying dividends is a business risk decision.

                      Businesses (including banks) don’t have to pay anything to shareholders if they don’t want to in any given year. Businesses can elect to retain earnings in the business if they wish rather than pay dividends.

                      So it doesn’t automatically follow that because banks generate x dollars in profit that x dollars will be paid out to shareholders.

                    • tsmithfield …
                      16 March 2016 at 1:09 pm

                      Not necessarily. If earnings are retained, there will be a bigger pie to divide across the shares. So, retaining earnings will more likely cause the share value to increase.

                      If your parents were to keep $1000000 in their estate rather than pay it out to you now, would their estate be higher or lower in value as a result?

                    • tsmithfield …
                      16 March 2016 at 1:38 pm

                      The pie will be larger than it would have been if earnings weren’t retained to cover bad loans.

                    • McFlock …
                      16 March 2016 at 3:32 pm

                      Not necessarily. If earnings are retained, there will be a bigger pie to divide across the shares. So, retaining earnings will more likely cause the share value to increase.

                      If your parents were to keep $1000000 in their estate rather than pay it out to you now, would their estate be higher or lower in value as a result?

                      The parents would have a million dollar estate.
                      I would not have a million dollars, though – just the possibility thereof, if everything goes according to plan.

                      And I incur costs from borrowing in the meantime, and opportunity costs from not being able to invest that money the way I see fit.

                      And the end result is not quite the same, even if everything goes as planned – I still get the million, just after I’ve incurred those costs. If I wanted my money in that company, I’d buy more shares in that company.

                    • Sacha …
                      16 March 2016 at 4:07 pm

                      After recent stress-testing exercises, the Reserve Bank seem to be expecting our large banks to get through by reducing those dividend payouts:
                      http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11606534

                      “We would expect losses of the order seen in the stress scenarios to be absorbed largely through lower bank earnings rather than through an erosion of bank capital”

                    • The Chairman …
                      16 March 2016 at 4:44 pm

                      “We would expect losses of the order seen in the stress scenarios to be absorbed largely through lower bank earnings rather than through an erosion of bank capital”

                      And if losses become greater than that, do they expect banks to claw back dividends already paid out? Hell no, hence the open bank resolution. Depositors take a haircut.

        • saveNZ 3.2.1.2
          16 March 2016 at 10:59 am

          Just shows how many assets the banks have, if their profits represent only 1%.

          Maybe they should sell a few assets themselves if they are so worried rather than continuing a potential crisis by not passing on interest rate drops.

    • joe90 3.3
      16 March 2016 at 11:04 am

      FEE huh, libertarian publisher of sexist, homophobic, racist claptrap since before the JB society’s Bob Welch imagined his first red under the bed.

      /

      • tsmithfield 3.3.1
        16 March 2016 at 11:20 am

        The hurricane Hugo scenario was included in an economics paper I did at Uni. I referenced that article because it was accessible online, unlike the uni paper which is long gone.

    • Draco T Bastard 3.4
      16 March 2016 at 11:44 am

      A benefit of banks being profitable is that they will be much stronger and less likely to fail.

      Actually, there’s no benefit to banks being profitable as it just means that they’re being massive bludgers on the rest of us. And that’s before we take into account the massive subsidies that they get.

      Best thing we could do for ourselves is to get rid of the private banks and start a government bank as a government service.

      • Colonial Viper 3.4.1
        16 March 2016 at 12:18 pm

        Pretty much. Although I still see a role for a small private banking industry comprising 2% to 3% of the economy.

      • Jones 3.4.2
        16 March 2016 at 9:55 pm

        Which is what we used to have with the Post Office Savings Bank.

    • Nick Morris 3.5
      16 March 2016 at 1:35 pm

      You don’t have to legislate. The banks can read the writing on the wall. The government has plenty of ways of inducing conformity or compliance on the part of the banks if it proves necessary, but it is most unlikely to come to that if you have a government who are clear on their requirements.

      Actually, there is a trap, sprung by reference to the high credit card rates – essentially the same argument as that over bank interest rates on loans. Now the government, by their own logic, have to either accept the idea of ludicrously high credit card rates and appear complicit with the gouging banks or attempt to do something about it, which makes them perfect hypocrites.

      The suggestion on Morning Report this morning that we should “put pressure on our banks” if we are not happy with their charges was one of the most ridiculous things I have heard for some time. Anyone who needs to use their credit card in this way will be shocked and surprised to discover that they have zero leverage when they demand a kinder, more generous attitude on the part of their pet lamb.

  4. saveNZ 4
    16 March 2016 at 10:32 am

    Great Post.

    Also great that Andrew Little is articulating what most people think. The banks are very profitable because they are ripping the people of NZ off. They are not passing on rate cuts in good faith so they can rout more profits off Kiwis who are feeling the pinch and in the case of the farmers escalating their bankruptcy.

    Also draws light on that ex banker Key is propping them up banks and financial institutions ripping off the farmers and other people in NZ.

  5. McFlock 5
    16 March 2016 at 10:52 am

    Banks are like petrol companies – when their costs go up, their prices are responsive to the change. When their costs go down, there’s often a suspiciously long lag for it to reflect in the prices they charge…

  6. Brutus Iscariot 6
    16 March 2016 at 11:22 am

    Yeehaaaw, let’s get mortgage rates lower so we can inflate the property market even further.

    Be careful what you wish for.

  7. Murray Simmonds 7
    16 March 2016 at 11:43 am

    tsmithfield:

    ” . . . . That is an incredibly low return on assets compared to what most businesses would expect to be making . . . .”

    yeah? Most businesses have REAL assets from which they have to make a profit. (Like a farm, buildings, cows, machinery for example).

    Banks have few real assets apart from their branch buildings and head offices. They make their money using fractional reserve lending, which means that among other things they hardly even need the deposits in their “vaults” in order to issue a new mortgage. The money they lend is created on the spot, at the time a new mortgage is taken out. By the simple act of writing a number into a spreadsheet.

    In return, they get, over time, all the money plus interest paid back to them (apart from occasional defaults). And where the is a default the mortgage is backed by REAL assets for them to seize in lieu of the mortgage repayments.

    The situation could hardly be more different from a REAL (non-banking-based) business.

    • Draco T Bastard 7.1
      16 March 2016 at 11:51 am

      +1

    • Phil 7.2
      16 March 2016 at 1:43 pm

      The money they lend is created on the spot, at the time a new mortgage is taken out. By the simple act of writing a number into a spreadsheet.

      This is simply not true. It’s not only completely ignorant of how banks operate within the prudential regulation framework, it’s also a violation of basic double-entry accounting concepts that have been well understood since before the time of Newton: Assets = Liabilities + Capital.

      • Murray Simmonds 7.2.1
        16 March 2016 at 2:42 pm

        Phil,

        This must be wrong then:
        ““Commercial [i.e. high-street] banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.”

        http://positivemoney.org/how-money-works/how-banks-create-money/

        And this from The Guardian:

        “http://www.theguardian.com/commentisfree/2014/mar/18/truth-money-iou-bank-of-england-austerity

        “In other words, everything we know is not just wrong – it’s backwards. When banks make loans, they create money. This is because money is really just an IOU.”

        I could go on, but i won’t.

        • Murray Simmonds 7.2.1.1
          16 March 2016 at 2:51 pm

          Actually, this is probably the most definitive paper on the topic of how banks create money:

          http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf

          • Phil 7.2.1.1.1
            16 March 2016 at 4:52 pm

            Thanks Murray, I’m familiar with those links.

            My post was not clear. My issue was with your statement “By the simple act of writing a number into a spreadsheet.”

            Do banks create money? Yes… but it’s a lot more complex than just mashing numbers on a keyboard.

            There’s a complex multi-stage process (which the BoE paper goes into) that involves both the creation and destruction of money as transactions and payments circulate through the financial system and economy, as well as the limits that banks face from prudential regulations.

            Side note: what the BoE does not explain in the paper, as far as I can tell, is why we call bank-created debt ‘money’ but not credit union or building society debt ‘money’ when the process is exactly the same.

        • Draco T Bastard 7.2.1.2
          16 March 2016 at 4:47 pm

          Phil’s been trying to argue against that particular truth for quite some time now.

          • Phil 7.2.1.2.1
            16 March 2016 at 5:12 pm

            We’ve been through this before, right?
            I remember trying to type up a balance sheet on a post here a couple of years back – not fun!

            —–

            The statement ‘banks create money’ is true in the same way ‘the sun rises in the morning’ is true. It depends on your position and point of view. They’re also, in and of themselves, not especially informative statements if you don’t have some conception of how and why those things happen the way they do.

            Banking is a complex business and, as part of that business, stuff that we as a society have all agreed to call ‘money’ gets created. But, creating money is not the goal – it’s a by product of the available technology and societal demands for how we want to transact with each other.

            I guess you could sum up my view as this: There are a lot of legitimate concerns about the size and power of banks (and the financial sector generally) in the modern world. But, the creation of money is not an especially relevant one.

            • Draco T Bastard 7.2.1.2.1.1
              16 March 2016 at 10:13 pm

              I guess you could sum up my view as this: There are a lot of legitimate concerns about the size and power of banks (and the financial sector generally) in the modern world. But, the creation of money is not an especially relevant one.

              All that size and power that the banks have that you’re concerned about? Yeah, that comes from their ability to create money. Given this fact I’d say that the creation of money is central to your concerns rather than irrelevant.

  8. Expat 8
    16 March 2016 at 12:02 pm

    This is an article from IMF, which includes research from Nobel prize winner 2014, Jean Tirole regarding regulation of the baking sector.
    It is pretty heavy going, the abstract pretty much outlines the main points.

    You’ll note the last sentence: “We show that the
    political process tends to exacerbate excessive risk taking and credit cycles.”

    Abstract

    We consider a moral hazard economy in banks and production to study how incentives for
    risk taking are affected by the quality of supervision. We show that low interest rates may
    generate excessive risk taking. Because of a pecuniary externality, the market equilibrium
    may not be optimal and there is a need for prudential regulation. We show that the optimal
    capital ratio depends on the macro-financial cycle, and that, in presence of production
    externalities, it should be complemented by a constraint on asset allocation. We show that the
    political process tends to exacerbate excessive risk taking and credit cycles.”

    http://www.imf.org/external/pubs/ft/wp/2014/wp1490.pdf

    • Phil 8.1
      16 March 2016 at 1:08 pm

      We consider a moral hazard economy in banks and production to study how incentives for risk taking are affected by the quality of supervision. We show that low interest rates may generate excessive risk taking. Because of a pecuniary externality, the market equilibrium may not be optimal and there is a need for prudential regulation. We show that the optimal capital ratio depends on the macro-financial cycle, and that, in presence of production externalities, it should be complemented by a constraint on asset allocation. We show that the political process tends to exacerbate excessive risk taking and credit cycles.”

      To translate to the most basic summary for the non-economist:

      Government policy and prudential regulation is good* at limiting the quantity or scope of activity a bank can undertake. It is not good* at determining the appropriate price for that activity.

      * “good” being shorthand for something like socially optimal macro-outcomes.

      • greywarshark 8.1.1
        16 March 2016 at 9:57 pm

        “how incentives for risk taking are affected by the quality of supervision.”
        Banks can’t be limited apparently if the experience of a USA watchdog is to be believed. She was part of a group that was supposed to be noting behaviour that was contrary to cautionary regulations, but said that when she wished to register a case for consideration her group leader demurred. What happens is that observers get into regulatory capture and too close to their target entities.

        I could look it up but its too late. It was about two years ago, and she was working for the Fed? which isn’t government anyway, they have privatised it.

  9. Rosie 9
    16 March 2016 at 1:24 pm

    That was a such a lame response from Key yesterday. He really must be desperate.

    IF banks did respond swiftly and accordingly to OCR cuts and you’re on a fixed rate mortgage you still have to renegotiate your rate with the bank, who will then charge a break fee to cover their losses. The bigger the interest rate cut the bigger the break fee.

    But don’t muck around and wait for them to drop it. Find the best rate you can and ask your bank to match it. When they do that, tell them you’re not paying the break fee, or at least the not whole break fee. I renegotiated our rate recently and went from 5.25 to 4.25%. Got the break fee reduced from $4K to $600. Didn’t have $600 so they put the $600 on my credit card at 2% interest. They can do this. You just have to ask.

    I’m not sure why NZer’s are so passive when it comes to dealing with banks. They operate in a profit making free market environment, and as customers you need to exploit that. The more people demanding more of their banks the more pressure it puts on them to be actually competitive instead of pretend competitive. Yes, of course there needs to be regulatory pressure but there needs to be people pressure too. Don’t tolerate them ripping you off.

    And why is anyone paying 20% on their credit cards? My Kiwibank mastercard which had been around the 12% mark forever went up to 13.45% last year, which is too high, but 20%, really?

    • Phil 9.1
      16 March 2016 at 1:36 pm

      And why is anyone paying 20% on their credit cards?

      It all depends on the circumstances of the individual. A credit card is, at the most basic level, an unsecured line of on-demand credit. It’s not remotely comparable to a residential mortgage or business loan. If something goes wrong and you aren’t able to (or wont) pay back the credit card debt, then there is no ‘thing’ that a bank can claim security over. Also, the rate of interest doesn’t kick in for 30/60/90 days (depending on the card) so if you are paying interest on your credit card debt, you’re subsidising the other credit card owners who pay off the balance each month.

      The average credit card rate of interest being paid, across all cards, is 11.4%.

      http://www.rbnz.govt.nz/statistics/c12

      • Rosie 9.1.1
        16 March 2016 at 2:14 pm

        Thanks for explaining the mechanics of it Phil – looks like I’m subsidising others then, with my credit card debt and subsequent interest I’m paying. Oh, for the good ol days when a credit card was only for emergencies and largely stayed at a zero balance.

        Come to think of it, does this mean the growing number of people who are reliant of credit to pay basic living expenses are holding up those who can afford to live?

      • Expat 9.1.2
        16 March 2016 at 2:20 pm

        Phil

        Often the credit card interest rate is dependent on the “annual fee”, some are often very high (fee), but offset by lower interest, and no fee cards attract high interest rates.

        • Phil 9.1.2.1
          16 March 2016 at 4:14 pm

          Yeah, I’m pretty sure the 11.4% I cited above excludes fees. That said, we’re talking about a fee of couple of hundred dollars* a year… when spread across the volume of transactions on the average card over the course of a year, it’s not (mathematically, at least) adding much to the effective interest rate being charged on the card.

          However, in my experience the fee is more closely correlated with the rewards points or other offers available to the card holder. I know my AmEx reward scheme is a lot more lucrative (and offers good discounts on heaps of things) than my Westpac Mastercard, but has a much higher fee attached to it. Whether I or the bank come out on top is probably a toss-up.

          *That’s a number plucked out of thin air, but feels about right from looking at my credit card statement a couple of months ago.

      • Colonial Viper 9.1.3
        16 March 2016 at 3:06 pm

        The average credit card rate of interest being paid, across all cards, is 11.4%.

        I’m betting that the 10% of highly indebted credit card users are the ones who make the banks absolute shitloads in profit.

        It’s unnecessary and the banks, like the casino, always win big in the end.

        • Phil 9.1.3.1
          16 March 2016 at 4:33 pm

          the 10% of highly indebted credit card users

          Citation needed?

          Total credit card advances outstanding are currently $6.3b. Of which, $3.9b are interest bearing, and $2.3 non-interest bearing. That suggests roughly 60% of credit cards are subsidizing the other 40%… nowhere near 10% subsidizing 90%.

          Of course, not all cards are created equal. Some credit card users will have a disproportionately larger level of outstanding debt than others. But, given that the vast majority of credit cards start with low available balances and are raised only after a record of spending AND repayment is established, I find it hard to see how that 10% number could be correct.

          • Colonial Viper 9.1.3.1.1
            16 March 2016 at 4:50 pm

            Total credit card advances outstanding are currently $6.3b. Of which, $3.9b are interest bearing, and $2.3 non-interest bearing. That suggests roughly 60% of credit cards are subsidizing the other 40%… nowhere near 10% subsidizing 90%.

            Good gawd that’s atrocious mathematicking you have done there, assuming that interest bearing card users and non-interest bearing card units are two different groups but full of identical members.

            • McFlock 9.1.3.1.1.1
              16 March 2016 at 4:54 pm

              Mind you, if phil were typical of those involved in the financial sector it would explain a lot about the last decade or so…

            • Phil 9.1.3.1.1.2
              16 March 2016 at 5:14 pm

              Did you not bother reading my second paragraph, where i address EXACTLY that point?

      • Incognito 9.1.4
        16 March 2016 at 9:09 pm

        Please correct me if I am wrong but a charging order can turn an unsecured credit card debt into a secured debt against the title of your property.

    • saveNZ 9.2
      16 March 2016 at 2:08 pm

      I’m just not sure the farmers are in a position to re negotiate their loans at much fairer prices. Who else will take them at this point? They need a push by government.

      Fonterra themselves charge 24% interest to their farmers on their farm source retail stores.

      Often farmers are not very financially literate or even politically aware.

      They have been manipulated by the government, Fed farmers, Fonterra and the banks in different ways and now told it’s their problem.

      For how many years have we heard how incredible dairy farming is by the government, media, Fed farmers and so forth – the farmers just believed them and did what they were told, produce more milk for the country, now they may lose their farms to the banks and asset traders.

      • Rosie 9.2.1
        16 March 2016 at 2:42 pm

        Hi saveNZ. I wasn’t thinking of farmers when I was talking about pushing back.

        Eg, a friend was recently complaining about their interest rate that was over 6%. When I questioned them about whether they thought this was acceptable they said they had no choice, they could do nothing about it. I don’t see this as an isolated case of indifference, or at least a sense of perceived powerlessness. It’s something I hear quite often, in conversation.

        Farmers, on the other hand may be facing genuine powerlessness. The Nat govt isn’t the farmers friend they have promoted themselves as for long.

        • Colonial Viper 9.2.1.1
          16 March 2016 at 3:05 pm

          The National Party has also been taken over by bankster neoliberals.

          • saveNZ 9.2.1.1.1
            16 March 2016 at 3:45 pm

            @CV – Key is a bankster neolib.

            • Expat 9.2.1.1.1.1
              16 March 2016 at 4:56 pm

              saveNZ

              And he has always been one, I don’t agree that National have been taken over by neo-liberalism, at least not since Muldoom, it’s their basic ideology.

      • Phil 9.2.2
        16 March 2016 at 5:16 pm

        Often farmers are not very financially literate or even politically aware.

        That’s a massively insulting statement to the farming community on a lot of different levels.

  10. Jo 10
    16 March 2016 at 2:04 pm

    The fact you even ask why credit card rates are so high, demonstrates how little you understand about how interest rates work.

    1st mortgage 5%
    2nd mortgage from say a finance company will be at least double (they have to wait for the first mortgage holder to get their money).

    Both these lenders will be secured against some type of asset.

    Overdraft will also normally be double the 1st mortgage rate and the rate will increase with the risk to the bank.

    Credit Card companies are not secured against any asset, the only way they can get their money is through bankruptcy or receivership proceedings, which are very slow and expensive (most sell their bad debts to a company specialising in debt collection and they right off the difference as a bad debt).
    As well credit card companies have to charge more because people have the option of paying the balance off before any interest is incurred, which approx half of credit card holders do, meaning the rest need to subsidise the prudent credit card users.
    That is why credit cards have higher interest and will continue to charge them. If you don’t like the rate; pay the balance off or don’t use one, very simple.

    • Rosie 10.1
      16 March 2016 at 2:28 pm

      Jo, is this a reply to me? If so can you please use the reply buttons. And if it is a reply to me can you please drop the patronising BS.

      So I’m not a finance sector whiz, so fucking what. Phil managed to explain clearly why credit card interest rates are higher, without being a jerk.

      As for this bit:

      “If you don’t like the rate; pay the balance off or don’t use one, very simple.”

      So what do you say to people like me who have only one income coming into the house, are in the early years of a mortgage, have high living costs associated with needing non funded medicines, have little chance of finding suitable part time work to fit around one’s illness and can’t get treatment for injuries as ACC won’t fund the only thing that works? What about mechanics bills? What about dentistry you just can’t put off any longer?

      What do you advise all those who are in a way worse situation than me who can’t cover their bills without using a credit card?

      “The fact that you even ask why people use a credit card if they don’t like the rate demonstrates just how little you know about the economics realities for far too many people”

      • Gangnam Style 10.1.1
        16 March 2016 at 3:02 pm

        “So I’m not a finance sector whiz, so fucking what. Phil managed to explain clearly why credit card interest rates are higher, without being a jerk.” +1000!

        • Phil 10.1.1.1
          17 March 2016 at 5:54 pm

          To be fair, I am pretty great at being a jerk most of the time.

          • Gangnam Style 10.1.1.1.1
            17 March 2016 at 6:10 pm

            I hear ya, & I couldn’t possibly comment~! But some jerks annoy me more than others.

      • Jo 10.1.2
        16 March 2016 at 4:17 pm

        my reply was to the columnist, I would expect a higher standard of comment and a greater level of understanding.

        • Rosie 10.1.2.1
          16 March 2016 at 5:07 pm

          Ok. Apologies for my swears then.

          However you’re well out of touch with reality when you think the answer to reducing credit debt is simply budgeting better. (10.2.2) Nice that your kids were taught budgeting skills. Great. So was I, but life changed, as it has for many.

          “I totally disagree with this idea that people use a credit card to get by”.

          This isn’t an “idea”. It’s a reality. I find your denial of reality personally offensive given my circumstances. I think anyone who is doing their very best but struggling none the less would also find that offensive.
          Do you think it’s a poor lifestyle choice when people are forced to pay their bills with their credit card because their incomes have not kept up with the increasing cost of living? Do you also blame poverty on booze and fags?

          Do you live on Planet Key?

          • Jo 10.1.2.1.1
            16 March 2016 at 6:13 pm

            Sure once you are in a cycle of using a credit card, it is hard to break it. But if you want to break the cycle you have to cut it up. Unfortunately people who spend every dollar they earn get CC’s it is always going to end badly.

            How did people survive before credit cards?

            No I don’t blame poverty on booze and smokes, but you must agree if you are on a low income they don’t help the situation.

            • Rosie 10.1.2.1.1.1
              16 March 2016 at 9:35 pm

              FFS Jo. Where have you been? Under a rock for the last twenty, thirty, odd years? And did you not read my comment at 10.1? You are fucking insulting all of us who are struggling through no fault of our own. Yes, it’s back to the swears.

              As for being a in “cycle of using a credit card”. You make it sound like crack cocaine. I got a credit card when I was in my mid 20’s (you’d like that, age sanctioned financial responsibility and all ). It was always intended for emergencies. We once had two incomes, we once had affordable accommodation, I once had good health. Never needed it, until now, 20 years later. Our society is failing Jo, our successive governments have abandoned their duty of collective care, all that’s left is banks. Our misery has been privatised, hence the debt.

              Get your head out of the sand.

    • Colonial Viper 10.2
      16 March 2016 at 3:02 pm

      Hi Jo,

      You don’t seem to realise how much money the banks are raking in off credit cards, and how excessive their interest rate charges are.

      IMO credit card interest rates should max out at 15% pa and no bank be permitted to charge beyond that level.

      The banks will still make a lot of money as credit card bankruptcy rates are very low: the banks get their money eventually.

      But if any bank wants to get out of the market because of too low profits, they can always give their share of the credit card market to someone else.

      (I am happy to bet that they won’t).

      TL/DR this is interest rate apartheid. If you are in a privileged class you can access money at 5.4% interest p.a. or even less.

      If you are not then you will be charged over 20% pa.

      • Rosie 10.2.1
        16 March 2016 at 4:01 pm

        “IMO credit card interest rates should max out at 15% pa and no bank be permitted to charge beyond that level.”

        Kiwibank made a record profit last year, up 27% on the previous year.

        http://www.stuff.co.nz/business/71382436/Kiwibank-makes-127-million-profit

        As mentioned, KB charge 13.45% on their mastercard. If they can make massive profits and charge less than 15% on credit cards surely the other banks can too?

      • Jo 10.2.2
        16 March 2016 at 4:36 pm

        It is like any commodity, they will charge what they can, and I agree with only two players in the market there is not a lot of competition.

        I totally disagree with this idea that people use a credit card to get by. The best budgeting advice I have given my children is; don’t get a credit card and fortunately they haven’t. Using a credit card is like Fonterra paying their bill after 90 days instead of 60, you get a 30 day holiday and then you are paying monthly again, but with a credit card the interest is crippling.

        Credit cards are not a form of a loan.

        From the moment my children entered the workforce, we have encouraged them to have different savings accounts which are paid into immediately their pay is deposited, no different to Grandma’s jars on the mantelpiece. They have all purchased cars and other consumer items from savings, at the same time as paying into kiwisaver and student loan payments (at twice the required level to get the debt down as quickly as possible).

        Personally I would like a minimum age put on credit cards of 25 years and the credit card company must cancel cards when people get into trouble and they are not allowed another card for 5 years.

        • Colonial Viper 10.2.2.1
          16 March 2016 at 4:53 pm

          You need to learn from the lesson overseas where wage growth has been squeezed for decades and people have tried to make up the difference using credit.

          If I were to be cynical I would say that capital has decided to pay out less in wages and instead lend the difference to workers as interest bearing debt.

          Also, please stop making excuses for the banksters bad behaviour. They won’t thank you for it.

          They need to be stopped because as we all know, banks are shite at self regulation and self discipline.

          Personally I would like a minimum age put on credit cards of 25 years and the credit card company must cancel cards when people get into trouble and they are not allowed another card for 5 years.

          These are reasonable and proactive steps to take.

          • Jo 10.2.2.1.1
            16 March 2016 at 7:16 pm

            They choose to use debt, it is a choice people make, the banks don’t force them.

            It still comes down to the basic premise; that people are blaming the banks for them spending money they didn’t have. At least trading banks do due diligence and insist on people make a full disclosure of their current debts and income, and insist that people have insurance etc. You make them all sound like dodgy loan sharks in a back ally, thankfully our banks are regulated and regulations have dramatically increased over the last 10 years.

            Banks do not set wage rates, so need to be cynical about that.

            • Colonial Viper 10.2.2.1.1.1
              16 March 2016 at 7:56 pm

              why are you being such an apologist for the banks?

              Tell you what, when society decides its had enough of usury, those banks are going to be all fucking gone and good riddance.

              • Jo …
                16 March 2016 at 8:18 pm

                I have seen some bloody awful lending and products sold by banks especially in the farming sector, they weren’t illegal but they were not ethical. Thankfully not as bad as the US where there are a couple of x-bankers doing some very long stretches in prison, and good job.

                I am not apologising for the banks, however they will be here as long as people want credit. Should there be tighter regulation; yes and if I was the government I would start with credit cards. An example of good regulation introduced was, stopping of the practice of banks just sending out credit cards and putting up people’s credit limit without the customer asking.

                As I said above there should be an age limit, cards should be removed from people who get themselves into distress with them and I would add; if people are only paying the very low minimum payment, then there should be a gradual increase in the percentage that they must pay and a decrease in the level of credit they are allowed. I know people should be able to manage their own affairs but sometimes they need a hand to show them how to fix the problem.

      • Jo 10.2.3
        16 March 2016 at 4:58 pm

        But if any bank wants to get out of the market because of too low profits, they can always give their share of the credit card market to someone else.

        All banks do this, they sell part of the credit card loan book to decrease their risk, common practice throughout the world, since the sub-prime market collapse and the sale of Visa and Mastercard.

        What about store cards? Had a look at what they charge, about the same.

    • Nick Morris 10.3
      16 March 2016 at 3:20 pm

      People who have credit card debt need it, or they wouldn’t resort to it.

      Your “Duh” approach to those who suggest that the rates are excessive is more than faintly irritating, Jo.
      Sure, credit card interest rates are higher than first mortgage rates, but banks don’t lend on credit cards in the expectation of default, or they wouldn’t lend at all (except stupid loans to the high rollers, of course). Even to get a credit card you have to be solvent and the vast bulk, of course, pay whatever interest is owed, whether it is fair or not.

      No one is suggesting that banks shouldn’t have a differential series of interest rates, just that they should not take advantage of the average debtor to profiteer on relatively low incidence of default.

      Claiming that there is a lower “true” interest rate on interest is a smoke and mirrors exercise requiring the lumping together of unrelated credit lines and does not apply to the high rates attached to a typical bank credit card rate of the sort complained of.

      • Jo 10.3.1
        16 March 2016 at 4:51 pm

        If you never have a credit card how do you get by and how did people manage before credit cards?

        • Colonial Viper 10.3.1.1
          16 March 2016 at 4:55 pm

          People got paid a level of wages where an entire household and mortgage could be run off the income of a single full time bread winner.

          • Rosie 10.3.1.1.1
            16 March 2016 at 5:10 pm

            Exactly.

          • Jo 10.3.1.1.2
            16 March 2016 at 6:20 pm

            What utter nonsense. For this to be true the money you spend on your credit card would have to be a gift!
            You have to pay the card off, you still have the same amount of money, you just spend it in a different sequence to your income (ie before you get it). Plus you have less money because you pay interest.
            Using your logic, people are now better off because they can afford to pay interest on their purchases.

  11. Expat 11
    16 March 2016 at 2:51 pm

    Here’s an article from the Australian Financial Review 11/03/2016 regarding the RBNZ OCR rate cut.

    “It is an extraordinary turn of events given the RBNZ has unwound all four of its ill-timed rate hikes and perhaps has more to do.”

    Read more: http://www.afr.com/markets/surprise-nz-rate-cut-does-pave-the-way-rba-economists-say-20160309-gnf63k#ixzz431bVOynS
    Follow us: @FinancialReview on Twitter | financialreview on Facebook

    It should be noted that the CBA bank in AUS, late last year pushed up interest rates 10 points. in a market of stable OCR’s of 2%, everyone cried robbers, including the current treasurer, Scott Morrison who made a scathing attack, the other three banks did not immediately follow the CBA, waiting to see what public sentiment was, after 5 days they (the other three banks) all jumped on the band wagon and raised their rates by a similar amount, business as usual.

    In the last 5 years the overall household debt has remained stable, but the difference between credit and mortgages has changed, credit borrowing has nearly doubled and mortgages reduced, this would indicate overseas investment in the Auckland property market, and that fewer Kiwi’s can afford to buy.

  12. Grim 12
    16 March 2016 at 3:00 pm

    Question for those that know more:

    http://www.rbnz.govt.nz/research-and-publications/videos/money-creation-in-the-modern-economy

    then consider this. are we being setup?

    http://m.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11468289

    Do the NZ based banks need to borrow from offshore to offset lending?

    Not according to the NZ treasury, so what’s happening here?

    I could be wrong but the only reason a bank would need to borrow is if their deposit to reserve ratio fell too low and that would only happen if they invested client deposits unwisely, or were borrowing to invest at a higher risk, nothing to do with lending to clients as loans are created via double ledger accounting and are balanced by a liability, and secured by property.

  13. Kiwiri 13
    16 March 2016 at 4:24 pm

    Don’t waste a good opportunity.

    Time to assist the banking market by putting forward some legislative and policy proposals to correct as well as reform and improve the banking sector.

    Also, will be nice to see a private member’s bill by someone in the House who still remembers to represent those of us citizens and voters who are outside.

  14. Gosman 14
    16 March 2016 at 6:11 pm

    Simple question for all the quasi-conspiracy theorists here who think Banks are somehow raking it in if they don’t lower interest rates at the same rate the OCR is lowered ( which shows an ignorance of how banks make money but that is a separate issue ).

    Why doesn’t Kiwibank capture the market by lowering it if the others don’t move?

    • Lanthanide 14.1
      16 March 2016 at 6:36 pm

      “Why doesn’t Kiwibank capture the market by lowering it if the others don’t move?”

      Kiwibank did lower their rate by the full 0.25%.

      Secondly, interest.co.nz calculated that if the banks didn’t pass on the 0.25% interest rate cut, they would profit to the tune of $327,000 per day: http://www.interest.co.nz/news/80594/we-put-value-what-banks-have-gained-and-will-retain-not-passing-all-ocr-cut-borrowers

      So are you going to say that the writers of interest.co.nz are ignorant as to how banks make money?

      • Expat 14.1.1
        16 March 2016 at 6:42 pm

        +1

      • Gosman 14.1.2
        16 March 2016 at 6:47 pm

        Yes that article is largely imbecilic. It made a small reference to how banks make money but then tried to argue that it is the rate they charge borrowers which determines profit.

        • Lanthanide 14.1.2.1
          16 March 2016 at 8:58 pm

          “but then tried to argue that it is the rate they charge borrowers which determines profit.”

          So if they reduced their mortgage rates by 0.25%, it would make absolutely $0 difference to their revenue? Is that your claim?

          • Gosman 14.1.2.1.1
            17 March 2016 at 3:52 am

            Revenue is not profit. Banks make their profits largely off margins not on what interest rate they lend at. The fact you (and Little) don’t seem to grasp this is laughable.

            • Lanthanide 14.1.2.1.1.1
              17 March 2016 at 9:07 am

              The banks tell us that the floating mortgage rate is higher than the fixed rates (particularly 2+ years) because the floating mortgage rate is based on the 90 day bill rate.

              The 90 day bill rate has dropped. Floating mortgage rates should drop. Banks should operate on a user-pays model: those people who are using mortgages that have (expensive) funding sources that are based on the 90-day, should receive a rate cut when the 90-day rate is dropped. Those customers should not be subsidising other customers that are on fixed rate mortgages, which are sourced on international funding.

              So, the bank’s margins for floating mortgages have widened, so the floating rate should drop to reflect this widening of margin. If the fixed rate margins have recently decreased, they should put up their fixed rate mortgages to reflect that.

              Pretty damn simple, Gosman.

      • Gosman 14.1.3
        16 March 2016 at 6:57 pm

        If Kiwibank is passing on the rate cut and others aren’t then the solution is obvious. People should switch lenders to Kiwibank. It is the benefit of a competitive market.

        • Lanthanide 14.1.3.1
          16 March 2016 at 9:01 pm

          I agree, however of course there is a direct cost to swapping banks (refinancing requires lawyer fees), it also assumes that Kiwibank is happy to take on the mortgage – they may not be, if the person’s financial position has changed from when they first took the loan out (even if they can still meet the mortgage payments). There’s also break-fees involved, if you’ve got a fixed mortgage.

          So the difference in interest rates between banks would have to be significant, for that to be a major factor in people swapping banks.

          The banks, knowing this is how their customers behave (because unlike you they aren’t idiots), use the customer’s inertia against them and don’t reduce their mortgage rates when they should, because they know they won’t lose any significant number of customers over it. Meanwhile they still get to pocket extra cash (as outlined by interest.co.nz which you have failed to refute in any meaningful way).

          • Gosman 14.1.3.1.1
            17 March 2016 at 3:46 am

            Ummm…. the issue is floating rate mortgages not fixed rate. Most of the costs involved with switching would be recouped quite fast by interest savings.

            • Lanthanide 14.1.3.1.1.1
              17 March 2016 at 9:04 am

              “Ummm…. the issue is floating rate mortgages not fixed rate.”

              Yes, because no one who has a mortgage, could ever have it split into fixed and floating portions, of which they could receive a discount if the floating rate were reduced by 0.25%, but they would have to pay a break fee for breaking their fixed part to move to another bank.

              Once again, this just shows what a very poor understanding of bank customers you have, whereas the banks understand their customers very well, and they use this understanding to screw money out of their customers because they know there are significant barriers to switching to a competitor for a better deal.

              “Most of the costs involved with switching would be recouped quite fast by interest savings.”

              On a $300,000 mortgage, taking the floating rate from 5.69% to 5.44% would reduce monthly repayments by $42. Since refinancing a mortgage costs around $1,000, it would take a tad under 2 years to recoup that cost. Remember, the whole point of the interest rate cuts being passed on is so the customer can *save money*. Transferring your mortgage to another bank because your own bank has refused to pass on rate cuts, and paying legal fees for the privilege, doesn’t actually save you money.

              Gosman, making shit up since ages ago.

  15. Gosman 15
    16 March 2016 at 6:26 pm

    BTW right wingers love it when left wingers make economically illiterate comments like Little’s. It provides ammunition for the argument that the left can’t be trusted on the economy.

    • Expat 15.1
      16 March 2016 at 6:40 pm

      Are you suggesting that the Nat’s have done a good job of managing the economy?

      • Gosman 15.1.1
        16 March 2016 at 6:49 pm

        Likely better than a Little led Labour regime given his economic illiteracy.

        • Drowsy M. Kram 15.1.1.1
          16 March 2016 at 8:54 pm

          Great answer to Expat’s YES/NO question – worthy of a politician.

        • mickysavage 15.1.1.2
          16 March 2016 at 9:35 pm

          You repeaters are so boring. SO Key is economically literate? Then why is crown debt so huge?

        • Expat 15.1.1.3
          16 March 2016 at 9:37 pm

          Do you have any examples of this that you can share with the rest of us, things like low unemployment, low public debt, or maybe flogging off the assets or even the $5B in loan interest repayments, more than the “big four” are currently profiting from the economy.

          • Gosman 15.1.1.3.1
            17 March 2016 at 3:48 am

            What happened about the crisis in manufacturing that the opposition was trumpeting a few years back?

  16. whateva next? 16
    16 March 2016 at 8:39 pm

    It’s a shame Andrew Little’s speech today wasn’t shown on 6 o clock news.
    http://www.inthehouse.co.nz/date/2016-03-16

  17. Phil 17
    17 March 2016 at 1:37 pm

    Tengentially related:

    The podcast “99% Invisible” recently had an interesting episode on credit cards, “The Fresno Drop”. It talks about the origin of the first credit cards in America – tested in Fresno, California.

    http://99percentinvisible.org/episode/the-fresno-drop/

  18. Takere 18
    22 March 2016 at 9:44 am

    What needs to be understood about the OCR is that it only effects banks & institutions that borrow from the RBNZ in NZ dollars. The 4 Ozzie banks very rarely borrow from RBNZ as they can borrow from their parent banks in Australia who borrow from the US & EU where rates are at 0%. 88% of the mortgage market is owned by the Ozzie banks, the rest is NZ owned banks and private lending institutions. Anyway, all the loans are numbers on a balance sheet created by banks which should be the domain of the RBNZ only. The banks only have to hold 16% of cash/assets in reserves(guarantee) which is customers savings & bricks and mortar. So no real risk to he bank(s).

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