Inquiry finds banks failed to pass on cuts

A parliamentary banking inquiry by Labour, the Progressives and the Greens found banks did not pass on the full effect of reductions in the official cash rate (OCR) to their customers, Labour finance spokesperson David Cunliffe said today.

Statistical evidence produced to the inquiry showed that while most interest rates had fallen since the global financial crisis began late last year, major banks had not passed on the full impact of OCR cuts into short-term interest rates charged to customers, he said.

"This failure was only partly offset by the banks' higher offshore and domestic borrowing costs," he said.

The three parties holding the inquiry - Labour, the Greens and the Progressives - today released its findings.

The report showed "considerable agreement" among submitters on a number of key banking and monetary policy issues, Mr Cunliffe said.

"The Government failed in its responsibilities to hard-working Kiwi families and taxpayers by refusing to take part in a bipartisan inquiry," he said.

The findings had justified the three parties giving New Zealanders a forum to voice their views, he said.

"The Government has wiped its hands of both its real and moral obligation, on behalf of homeowners and taxpayers, to insist that the major banks act as good corporate citizens," Mr Cunliffe said.

The inquiry recommended more policy work to explore reforms to better align bank supervision, monetary and taxation policies.

It focused attention on what submitters identified as serious defects in current monetary policy, including ineffective control of credit expansion, an excessively volatile exchange rate which disadvantages exporters and the tradable sector, and perceived biases in the tax system in favour of buying property and against producing goods and services.

It recommended more policy work to consider ways of making improvements in all these areas.

It believed it was important to set up multi-party talks to discuss a more balanced tax regime that encouraged productive investment and discouraged speculative purchase of housing property.

It also recommended:

* the Reserve Bank publish regular statistics on the cost of overseas borrowing by New Zealand registered banks, including details on the composition of this cost in relation to amounts borrowed.

* the Reserve Bank publish a study on the flow of funds in the New Zealand interbank market.

* the Reserve Bank do regular surveys of the business community to ascertain to what extent business owners finance their businesses on the basis of mortgage on their house(s), and to establish the pros and cons of such capital financing.

* the Government consider increasing the capital funding of Kiwibank to promote more effective competition on bank lending margins.

* that an "appropriate agency" conduct a full review of competitive conditions in the New Zealand banking industry.

Progressive Party leader Jim Anderton said party politics should be put aside in search of monetary policy which supports people who produce tradeable goods "rather than those who speculate on property and take the profits off-shore".

The report proves that Australian owned banks did not pass on all of the cut in the OCR, he said.

While the Reserve Bank cut the OCR from its high in mid-2008 of 8.25 per cent, to only 2.5 per cent today, banks kept a one per cent margin in interest rates for themselves, he said.

One per cent extra interest added $787 million in costs for New Zealand businesses; $460 million extra to the cost of loans in the farming sector; and $1.6 billion to the cost of mortgage repayments, he said.

"This tells us it doesn't matter what the Reserve Bank does with interest rates; the big Australian-owned banks will do whatever they want."

Fifty organisations and individuals made submissions to the inquiry - from the Manufacturers and Exporters Association to the Council of Trade Unions.

"The government can no longer sit on the sidelines and say `there's nothing we can do'.

"We need to look at regulating the banking sector so that ordinary New Zealanders don't pay (in interest rates or hidden bank fees) while the Australian-owned banks make excessive profits."

- NZPA