Editorial: Banks need to reiterate ethical base

The world, in the phrase of a leading banking executive, is awash with cash. There is funding aplenty for banks to do what they do; sell debt to customers. It stands to reason, therefore, that to maintain profitability in a competitive market, they will seek to provide credit in ever-increasing sums and in increasingly novel packages. The danger lies in this being done in ways that pay too little heed to the industry's ethical code. The sort of ways that have raised the ire of the industry watchdog, Banking ombudsman Liz Brown, and some of their own staff.

Westpac staff went on strike before Christmas, saying they were unhappy because sales targets for credit cards and loans were included in a pay contract. Ms Brown, for her part, has criticised the extending of credit to customers who may not be able to afford repayments and the pre-approving of credit cards to people who have not applied for them. In particular, she wants the wording of the Code of Banking Practice altered to ensure banks have a customer's financial details before signing lending contracts.

Several examples of banks' increasingly aggressive approach have surfaced. One bank offered credit cards with pre-approved limits of up to $5000 to thousands of non-bank customers on the Fly Buys database, without making substantial financial checks. Bankrupts and unemployed people were among the recipients. In another case, a beneficiary with a gambling addiction and bipolar disorder was initially given a $3000 credit limit, which was upgraded to a gold card with a $9500 limit.

More fundamentally, in terms of impact on the Reserve Bank and the economy, the banks have happily used uridashi bonds to create a predominantly fixed-rate mortgage market. In their homeland, however, they have created far fewer problems for Australia's central bank by sticking largely to floating mortgages.

It is a moot point whether the banks are driving what has become a lending frenzy or merely responding to customer demand. Either way, New Zealanders have become the worst savers in the OECD. Debt servicing as a percentage of income has become a source of particular alarm.

It must be noted that banks do not force people to incur debt. Buyers must bring to these products an awareness no less stringent than that applied to any other commodity or service. Just because credit is available, it does not have to be accepted. Inappropriate debt is, after all, rather more serious than buying the wrong can of baked beans.

For that very reason, banks also have a role to play. In some instances, they have overstepped the mark. Their code of practice requires them to "act fairly and reasonably" towards customers in a "consistent and ethical way". When the ombudsman becomes concerned that a loophole in that code is being exploited, it is reasonable to assume there has been some straying from that principle.

Banks, of course, do not want bad debts on their books. It is not in their interest to supply credit to customers who may not be able to repay it. Their degree of security, even in the housing market, goes only so far. Yet it is easy to lose sight of such fundamentals in a booming market, particularly if institutional memory is in short supply. When, for example, there is no recall of banks' overindulgence in the commercial property market of the late 1980s.

It is, therefore, in everyone's interest for lending to be prudent and ethical. For credit products to be explained fully to customers and not sold to them if they are unsuitable in any way. For a culture that serves people well - on both sides of the counter.