Battlers vs billion dollar banks

Written By: - Date published: 11:56 pm, April 21st, 2010 - 33 comments
Categories: business, capitalism, monetary policy, Unions, workers' rights - Tags: ,

The New Zealand banking sector made a tax-paid profit of $1.05 billion in the most recently reported quarter. That is a huge amount of money. It’s over $11 million a day or $479,000 an hour – 24/7.

The result is all the more remarkable when you consider that it is a near reversal of their performance in the previous quarter, when they reported a combined loss of $1.2 billion. That loss was the result of the banks having to pay the IRD over $2.1 billion in back taxes after the high court found some of them had committed tax avoidance.

If that wasn’t enough the massive profit was recorded in some of the worst economic circumstances in a generation. Unemployment has hit a 10 year high; many workers have been forced into accepting wage freezes or cuts; the banks cost of wholesale credit has increased etc etc.

So they have done extraordinarily well given the circumstances.

But despite this massive profit would you say that your experience of banks has improved? Have your fees gone down? Has your mortgage payment become more manageable? Is your bank offering you new and better services? Are there enough staff in your local branch? Do you even have a local branch?

The New Zealand finance workers union Finsec has teamed up with our Australian counterparts, the FSU to run a Trans-Tasman campaign for Better Banking that is calling into question the whole way that banks operate down under.

We’re asking bank customers to take a few minutes to complete a survey in which we look at some of the key issues of our campaign such as:

  • The costs of fees charged and interest on debt and the way debt is sold, even to customers who can’t necessarily afford to repay
  • Banks increasing the interest rate margins customers pay
  • How our banks have cut costs in ways harmful to New Zealand (such as through offshoring of jobs) when their profits were increasing

We’ve tried to push the New Zealand government to adopt measures that would increase public accountability in our banking system, but have found the National government in particular to be on the side of the banks rather than on the side of customers.

So we’re working on both sides of the Tasman and hope that the views of the public will push the Australian and New Zealand Government’s to  lends a more sympathetic ear. The more people who fill in the survey the more chance we have to win the changes we all deserve.

Andrew Campbell

Finsec Campaigns Director

33 comments on “Battlers vs billion dollar banks”

  1. gingercrush 1

    That was a slightly strange survey. I love my bank and I think we should be rather thankful for our banking institutions. Considering what happened elsewhere etc.

    BTW many of us use multiple banks therefore I found it frustrating that the survey didn’t accommodate those who use multiple banks. (Though I guess I could use a proxy to do the survey twice)

    • felix 1.1

      Me too. I’m a customer of two banks, one of which I find friendly, helpful, and reasonable with the fees (guess which one). The other bank are a bunch of ungodly bastards with whom every dealing is an expensive test of my patience.

      I could have taken the survey twice and given almost opposite answers.

  2. Jenny 2

    Make the banks pay

    Join the campaign

    http://www.badbanks.co.nz/

  3. tsmithfield 3

    “The New Zealand banking sector made a tax-paid profit of $1.05 billion in the most recently reported quarter. That is a huge amount of money. It’s over $11 million a day or $479,000 an hour 24/7.”

    What you are saying is: Shock, horror, this is a huge figure and much too much for one business sector to be making.

    On what basis do you make this claim? How much has been invested to generate this profit? Remember, banks, as with other businesses, are taking risks with not only their money, but also with the money of their depositors, who can be average NZ families. Therefore, they need to make enough profit to justify putting the money of their investors (including average NZ families) at risk.

    If they can only make enough profit on what has been invested to justify a low risk, then they won’t be lending money out to risky endevours such as lending to small businesses, or you and me . They will stick to the safest investments they can find. Not too good for growing the economy though, is it?

    So try and put a bit more context to your figures rather than trying to shock and awe with big numbers.

    What is the return on investment?
    What is a justifiable return to considering the risks involved in doing business?

    Then I might find the article a bit more interesting.

    • Bored 3.1

      TS,

      I dont think the numbers per se shock, nor does the return on investment or justified returns on risk. What is contentious is the manner in which the banks treat the standard deposit holder (i.e you and me). We probably resent banks because:
      1. They as demonstrated can treat us however they like with charges we cannot influence except by going elsewhere in which case we get copy cat cartel response.
      2. They dont actually bear risks when the crunch happens….they socialise them, and as happened during the recent crash they do this at the expense of the taxpayer.
      3. They create money (fractional banking) out of thin air in our name.

      When the Papacy banned usuary banks could not be run by Christians if they wanted to go to heaven, it was seen as evil. The reason for this viewpoint is still evident in the action of banks. Further the Pope understood the challenge that money would have to the spiritual world in temporal behavoirs. It would seem to me that the Papacy was correct in outlawing usuary. Do not however confuse this ban with commercial practices demanding a return, these were merely tied to the material as opposed to ephemeral (money). There may be some historic echo in how we see banks five hundred years later.

      What I am getting at is that when we see the banks as usurious, they dont dissappoint. My answer is to socialise the usuary, we the citizens should own the banks, the right to create money in our own name, and control of our own currencies.

      • Jared 3.1.1

        Pet peeve. Our BANKS in New Zealand didn’t ask for a hand out, the Finance Companies didn’t either, the Labour Government in an attempt to provide stability in the market introduced the Deposits Guarantee Scheme, but you must remember our banking system is in far better shape than the American banks people love to chastise for wanting a hand out.

        Also, I don’t agree with the nationalisation of all banks. Having commercial banks outside the control of the state provide a competitive environment that works for customers. I work for Kiwibank but bank with Asb, why? because Kiwibank branches are still located in NZPost outlets rather than real branches. I prefer going to an Asb Branch and talk to someone whose job is banking, not sending letters. Also, the fees situation has changed remarkably in the last couple of months, most banks have removed substantial fees like dishonoured AP charges. So your assertion that it is a cartel response to charges is incorrect, they are very competitive with each other.

        • Bored 3.1.1.1

          Jared, You are right our banks did not ask for a hand out. The government then as I recall put in place the deposits and loans guarantee scheme specifically because of fear that the international banks might fail and our banks suffer the knock on effects. And you cannot deny that the taxpayer worldwide bailed out the international finance system, especially Wall St.

          My experience of banks as a customer for 50 years tends to confirm my assertion that with regard to charges banks act in concert, lets just call it aped behavoir as opposed to cartel. Where one leads the others follow for better or worse as far as the customer goes. When the customer benefits you can tell that the banks are having issues of competitveness. I do however like banks that treat you as a person and customer, pretty rare now.

          On the nationalisation front I dont care what markets do, no bank except the bank of the last resort i.e you and me ( as demonstrated by the US bail outs which were tax payer guaranteed) should be able to create money in my name or yours. To do so forces us, the citizenry onto the wrong side of the golden rule (he who makes the gold makes the rules). Bankers should be the servant of the people, not their lords.

    • Clarke 3.2

      ts, it might be helpful if you did a little bit of research on how credit is created in a modern economy, as it would help you to avoid basic errors such as this one:

      How much has been invested to generate this profit? Remember, banks, as with other businesses, are taking risks with not only their money, but also with the money of their depositors, who can be average NZ families.

      You seem to have the idea that banks take in deposits (the mythical average New Zealand family) and then loan them out to hard-working businesses. In reality, this hasn’t been true since the 19th Century – today, banks create money by loaning it into existence, then borrow from the central bank to cover their fractional lending requirements. Here’s Wikipedia on the subject:

      The mainstream economics theory of monetary creation is that commercial bank money is created by commercial banks re-lending central bank money: the central bank (an institution that can be characterised as a partnership between the government and a private corporation) lends money to another commercial bank, which re-loans part of it, due to fractional reserves, and this portion is in turn itself re-lent (it is re-re-lent central bank money).

      On this basis – that the banks have negligible capital invested and negligible risks, other than the ineptitude of their own traders – their profit margins are exceptionally wide, and likely to be a drag on the profitability of the companies they lend to.

  4. Bored 4

    Just as an aside, banking and Eftpos represent a fabulous hidden rort of you and I….given that our wages are now generally deposited direct to our bank accounts and we use cards when we purchase.

    Consider this: the bank does not have to front with hard cash for the employer so they retain the deposit on which they can generate interest by loaning it elsewhere. Granted they pay interest aswell but only at a very much lower amount…kerching Bank 1-0.
    The use of eftpos attracts charges to the card holder and the merchant…kerching Bank 2-0.
    When we have too little the bank bridges the gap for some of us with overdraft facilities.kerching Bank 3-0
    The above encourages our profligacy kerching Bank 4/5/6 – 0

    I could go on till the bank is 100 nil up….if we however recieved our pay in hard cash we might be at risk of losing it to robbery or misplacement…but the bank would not see it (or only the surplus). They might then treat us a hell of a lot better.

    • Pascal's bookie 4.1

      The whole system needs a good hard lookin at.

      http://www.nytimes.com/2010/04/21/opinion/21foer.html

      seems to me at least that fees should be smaller now than when all transactions were handwritten and physically carried between banks.

      • andy 4.1.1

        Banks also have a thing called ‘sweeps’, every night the sweep up all the small deposits in all of the accounts and can lend short term against all those aggregated deposits to businesses who need very short term funding or an Overdraft facility, usually overnight.

        So they charge you for having your money in the account and use that money but don’t pay you for it via less fees or higher interest on chq style accounts.

        • Draco T Bastard 4.1.1.1

          Which is supported by the way the banks transfer money to other banks. If I pay someone @ 10am via internet banking the money goes out of my account @ 10am. The bank transfer doesn’t occur until 10pm (different banks use different times). That’s 12 hours that that money is “missing” but the bank will still be earning interest on it.

  5. RedLogix 5

    One special pet hate of mine is mortgages with 25yr plus terms. They are the most common and insidious forms of usury. Mortgage terms should be legally limited to a maximum of 15yrs.

  6. ak 6

    Maybe a good time for someone to kick off a “Move your money” campaign a la Huffington Post (quite successful apparently) – in our case of course to Kiwibank or TSB. The current Kiwibank ads would assist, and TSB is growing like a mushroom, so it’s already out there….a total of profits by the big four for the last decade or two would be a pretty mind-boggling selling point.

    • nzfp 6.1

      “Maybe a good time for someone to kick off a “Move your money’ campaign” absolutely. There are soo many benefits to this, the fact that KiwiBank is public means all of the “$11 million a day or $479,000 an hour 24/7” profits could be re-invested back into our economy as micro-loans or cheap 0% – 1% farmers/student/small medium business loans or green sustainable transport and power infrastructure or free university education or free dental care or no GST and so on and so on…

  7. Chris 7

    I would have thought that Finsec, as a corollary to the campaign, would be investigating ways of setting up their own banks. Can’t beat them, join them, as Kiwibank proved.

  8. Ianmac 8

    I had banked with the BNZ for decades. But the bank charges kept on mounting up which seemed a bit cruel since they had the use of my modest funds to make a profit. So I went in and cancelled my accounts. The response was but let’s find ways of reducing the bank charges. We are sure that we can.
    Nope. You are too late. It is dishonest to offer reductions only after I wish to close my accounts. Should have offered before.
    I put all my accounts into the PSIS and the charges are minimal, the service excellent and the service international.

  9. outofbed 9

    The SBS bank give me xmas cake and real coffee at xmas , no large screens between me and the teller and are very very customer orientated , I want to have their babies
    The ANZ in comparison are the devil

  10. On a relevent tangent…

    I’m sure most of you have read this but seeing as how this is the sector where Key got his chops from i thought it might be interesting for those who haven’t…

    http://www.rollingstone.com/politics/news/;kw=%5B3351,11459%5D

    …explains why he’s keen on the ‘cap and trade’ ETS scheme as well, cos i bet he’s got a wad of carbon credits ripening up nicely in his blind trust.

  11. Nationalise the parasite banks. They do nothing but push state created money and make super profits.
    They take no risks as they are backed by state created guarantees. They get bailed out if in trouble. They are too big to fail. They fuel land speculation. The fuel speculation in currency. They spawn amoral imbeciles like John Key. They are the enemy of the people.
    Amazing what a petty, docile, subservient bunch of wankers we bank customers are.

    • Jared 11.1

      When was the last time a NZ bank got bailed out (other than the BNZ back in the early 90’s)
      Also, they provide a service for us. If you don’t like it, don’t use them, use kiwibank. But, in reality Kiwibank isn’t that dissimilar.

      • Draco T Bastard 11.1.1

        They do provide a service but the $1.02b profit is a dead weight loss to the NZ economy. Why would we want to keep losing?

        • Jared 11.1.1.1

          Because it would be hypocritical to expect a net profit from investments in the Super fund from offshore investments in companies and not expect offshore companies to trade in NZ for a profit. I totally don’t understand the nationalistic anti free market approach the left have. The banks in NZ are regulated, well run, and provide a generally fantastic service. Why does it matter who runs them? Sure they provide a profit for offshore services, but they also provide a supply of loanable funds for NZ enterprise to generate growth and profit within NZ. They also provide employment opportunities and in the case of ASB provide charitable donations.

          • Draco T Bastard 11.1.1.1.1

            I’m quite happy to have all FDI around the world to be banned.

            Why does it matter who runs them?

            It matters because foreign investment means that the profit goes overseas which means that the wealth that was created within an economy can no longer be reinvested in that economy. This forces that economy to stagnate and eventually to start failing.

  12. nzfp 13

    Hey Clarke,
    I was going to respond to “ts” highlighting the understandable and common misconception about banking. ts – don’t worry, most people in the world think banking occurs in the methods you described – unfortunately it isn’t true as highlighted by Clarke.

    Our very own New Zealand Banking Association (NZBA) and Reserve Bank of New Zealand (RBNZ) are also great resources for explaining credit creation.

    The NZBA published “Banking in New Zealand (4th ed)”, originally published in 1991 and revised and updated in 1997. Chapter 4. “THE CREATION OF MONEY AND CREDIT” states:

    There is a direct mathematical relationship between the fraction held in reserves (r), the initial cash injection (M) and the deposit money created (D) which is D=M/r. In the example above, M = $100 and r = .1 (or 10%) so D = $1000. This simple credit multiplier formula illustrates that the smaller the fraction banks hold as reserves, the more deposit money and credit is created. (page 19)

    The RBNZ published “Defining money and credit aggregates” states:

    The deposits, or money balances held with banks are the direct counterpart to the assets that banks hold on the other side of their balance sheets, namely their loans. When a bank makes a loan it places the amount of the loan (which constitutes “credit’) in the borrower’s deposit account (which constitutes “money’), and the latter can be “spent’. Hence, an analysis of the role of money in the economy needs to incorporate the role of credit. Thus, throughout this article money and credit will often be referred to together. Indeed in many respects they are “different sides of the same coin.’ (page 1-2)

    Clearly the Banks create credit when they make loans. However, what is rarely covered is the fact that the Banks now control over 98% of the “credit” in circulation in our society. The RBNZ is the sole source of the “notes and coins” in circulation. However, the “notes and coins” also represent the only “money” created by our Government. The RBNZ C1 Monetary aggregates demonstrate that the total volume of notes and coins held by the pubic is only 3.477 Billion dollars. This is important because the “notes and coins” are the only “money” that is interest and debt free. The RBNZ C1 Monetary aggregates also shows that the M3 (which loosley translates to the total money supply including Bank credit) is 205.430 Billion dollars, that means that the percentage of money and credit in circulation that doesn’t carry interest bearing debt is (3.477/205.430*100) 1.7%. That means that the other 98.3% of our money supply is owed to a Bank at interest and that interest is generating the “$479,000 an hour 24/7” profits to the Banks.

    Another problem to consider is that this windfall of profit is going to a cartel of almost entirely Australian Banks (ANZ National, ASB, Westpac, BNZ). That means that these profits – like the 40,000 New Zealand citizens a year – are winging their way over to the Gold Coast never to come back again. This represents a loss of money and credit in our economy requiring households and businesses to take out more loans at interest to replenish the lost Bank profits which results in a “growth” in our economy and ultimately the loss of more money and credit – just like a pyramid or ponzi scheme.

  13. tsmithfield 14

    I would like to respond to several points above:

    Bored: “What is contentious is the manner in which the banks treat the standard deposit holder (i.e you and me).”

    Bored, if you want to see true immorality from banks, go and look at the situation in the US. Over there the people have bailed the banks out, and lent them money at essentially 0%. The response of the banks has been to invest that market in stocks and other normally risky assets but with essentially no risk because they are guaranteed by Uncle Sam. However, they have got the lending taps turned off so far as the average citizen is concerned, the very people who have effectively rescued the banks. At least our banks have kept lending and have been generally fairly supportive in comparison to US banks.

    Clarke: “ts, it might be helpful if you did a little bit of research on how credit is created in a modern economy, as it would help you to avoid basic errors such as this one:”

    I know a bit more about this than you give me credit for, and I think you are missing an important point yourself in this respect.

    When credit is created, it is created against an asset (a personal debt owed to the bank, a house mortgage etc). The money is not quite created out of thin air. It has to be represented by an asset on the other side of the equation. This creates a revenue stream for the banks against which they plan their own expenditure and other investments. But what happens when the value of the asset suddenly depreciates dramatically as in the subprime saga in the US? Most of the “assets” that have been created and the associated income streams suddenly diminish hugely. Thus banks can suddenly become insolvent. So there are definite risks for banks in their business activities. Its not quite like creating money risk-free and lending it out as you seem to believe. Banks have to account for this risk by charging appropriate interest rates and generating sufficient profits.

    • Descendant Of Smith 14.1

      However having worked in the banking industry for a number of years in a past life these sorts of things also happened:

      Clients who would overdraw by $20-00 having a cheque bounced and charged $30-00 for the privilege while a business $1million over their overdraft limit not having anything bounced ever

      In those days Reserve Bank ratios were quoted as the reason for bouncing the poor working class buggers cheque who often ended up in a viscous cycle where cause the bank fees left them less money their A.P’s bounced resulting in a downward financial spiral.

      It was quite clear that the little fulla was paying for the big fulla.

      At least in those days the $30-00 fee could be justified by the work done. As once the cheques came back from databank someone would pull them out and they would be taken upstairs where the clients file would be reviewed and someone would make a conscious decision about bouncing them. They decision would be typed out and then a clerk downstairs would type out a dishonour notice in duplicate and post one notice out to the client and one to the person who banked the cheque along with the cheque.

      There was some work involved and some conscious decision making done. Only a small number of people had their cheques bounced and while it was clear to me that working class people were much more likely to have this happen to them it meant that in a reasonable sized branch maybe 30 -50 cheques per day got bounced.

      The banks then decided to totally rort by automating the process and by introducing honour fees. This in effect meant that every transaction you had over your limit – even if your pay was going in tomorrow incurred an automatic $30-00 fee for being honoured.

      I don’t know how much money the banks rorted off people through doing this but it would have been enormous – money for jam. It was even more farcical when I had a postdated cheque – legitimately post dated – banked early by my children’s school. It was a mistake on their part. When I asked why the post dated cheque was accepted and incurred a fee my choice was pay a $30-00 fee for it being honored or a $30-00 fee for it being dishonoured. You clearly coundn’t win.

      At least too in previous times banks actually went through cheques looking for fake signatures or trust accounts with only one signature instead of two. I know several instances of fraud by lawyers and trust accounts were picked up in that way. These days they don’t even get looked at.

      They clearly don’t see any role any more in preventing this type of abuse from their own account holders.

      These are only little things but for everyday normal working class people make an enormous difference.

      There are also issues of margins between the interest rate they charge and inflation – their is always a bigger gap between inflation and rates in NZ than Australia i.e. they make more money off us.

      Before the latest crash it was obvious to me that banks were following similar behavioral patterns to when the crash came in 87. They had relaxed their lending criteria to loan above 70% to 80%. This increases the exposure and also pushed house prices up through more people competing as more can access easy credit. This puts finance companies under pressure as good payers who previously couldn’t meet the banks deposit criteria moved out of the alternative finance sectors for borrowing for mortgages. This leaves the finance sector left with a greater percentage of risk based around second hand cars and HP’s etc.

      From my observation that pattern spells disaster.

      You then see the charlatans come out of the woodwork promising great returns, you see previously invisible share-market spokesman telling ordinary people it’s a great time to invest and the doom and gloom merchants are wrong, you see the forestry people on telly saying what a great investment this.

      In reality many of the well off by now are moving their money out of shares and property and getting the ordinary working class people to invest. They are stealing their wealth cause they know the crash is coming.

      I could see this and said to people it’s 87 all over again. But I’m just an ordinary guy – although I did influence a few people who have avoided the worst effects of the crash and not lost substantial amounts of money. I could have been wrong in seeing the same pattern but I wasn’t.

      It was quite telling when a property investor locally said to me he had sold all his properties and was sitting with several millions of dollars waiting for the crash. He knew it was coming and had been in the game long enough to know when to get out and wait.

      These are simple observations of how the banks both rort and mis-manage. you can argue complex calculations and world markets and a whole range of theory as much as you like but sometimes the simple observation of what I see in front of me tells me I’m being ripped off and my money isn’t being looked after.

      • tsmithfield 14.1.1

        I agree that sort of behaviour is clearly not good enough.

        I am with the BNZ. At least, to their credit, they have done away with honour fees. Also, our personal banker has to personally approve any cheque dishonor for our personal or business accounts. Even when honor fees were still in play, the few times we incurred a fee, our personal banker was happy to waive them for us.

        So, the BNZ have been quite user friendly in my experience.

  14. nzfp 15

    Hey ts,
    I think Clark was addressing the common misconception that Banks lend customer deposits when in fact increased customer deposits allow banks to create credit at 90% of the new deposit.

    But what happens when the value of the asset suddenly depreciates dramatically as in the subprime saga in the US

    Yes and this is a very important point and is described in the “Stuff” article where “[i]mpaired asset expense improved significantly during the quarter”. Impaired assets are defined:

    Investopedia explains Impaired Asset
    If the sum of all estimated future cash flows is less than the carrying value of the asset, then the asset would be considered impaired and would have to be written down to its fair value. Once an asset is written down, it may only be written back up under very few circumstances.

    The effect of asset write-downs can be greatly magnified when leverage is considered. In the last days of Bear-Sterns it was found that “Bear had $11.1 billion in tangible equity capital supporting $395 billion in assets, a leverage ratio of more than 35 to one”. This is no surprise because “a 2004 SEC exemption, given only to five big firms, allowed them to lever up 30 and even 40 to 1”. High levels of debt means it takes only a small decline in the value of the firm – such as the case of write-downs for impaired assets – for the firm to go bankrupt. This was highlighted during the crash as many of the mortgages bundled in the Collateralised Debt Obligations (CDO) and Collateralised Mortgage Obligations (CMO) sold by Wall Street Banks were found to be fraudulent, not only that but Goldman Sachs was found to be betting against CDO’s they created and sold themselves with insurance policies called Credit Default Swaps (CDS) taken out against AIG.

    AIG was the single biggest recipient of former US Treasury Secretary Henry Paulson’s TARP bailout. The majority of AIG’s TARP bailouts went to counter parties of their CDS’ exotic derivatives. Goldman Sachs was the biggest recipient of AIG bailout funds for AIG CDS’. Henry Paulson was the CEO of Goldman Sachs before becoming the Treasury Secretary. Considering all of this – it all starts to look a wee bit fraudulent – and this maybe why on April 16, 2010 the Securities and Exchange Commission “charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter”.

    • tsmithfield 15.1

      Yes I was aware of that too. However, I don’t think it changes the point I was trying to make.

      • nzfp 15.1.1

        No it doesn’t at all – sorry mate – I was reinforcing your very good point and at the same time I just *had* to throw something in about the fraudulent banking practices of Wall Street.

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