Editorial: Small is good for Kiwibank

Kiwibank was set up four years ago as a modest initiative of New Zealand Post and the Alliance Party to provide a service to small depositors who liked to do their banking over the counter and preferably with a bank that was New Zealand-owned. Taxpayers provided almost $80 million of its initial capital and that, we were assured at the time, would be the extent of the public cost.

Since then the bank has received injections of $155 million from its parent company and this month it was reported that taxpayers will continue to pump as much as $40 million a year into the operation. This is not, we are assured, a measure of failure. Far from it; the capital is needed to maintain the bank's required ratios as its loan book grows by about $1 billion a year.

Chief executive Sam Knowles says it is on a path to "become a big bank". At present levels of growth the bank would require about $20 million of extra capital every six months, he said. "Those capital needs will come down as we increase profits. There will be a time when we pay dividends but that does depend on the rate of growth."

This is exactly what was likely to happen from the moment the "people's bank" was a gleam in the eye of Jim Anderton. The bank was never likely to "fail" in a financial sense with taxpayers ultimately standing behind it. The risk was rather that it would grow like topsy, unrestrained by the normal commercial disciplines of shareholder risk and return. Its shareholder, NZ Post, has been a commercial success since it became a state-owned enterprise, maintaining a universal mail delivery service through an era that has seen the arrival and vast expansion of electronic messaging.

But NZ Post literally cannot fail; no Government will do without a physical mail delivery of some frequency to every household in the land. Electoral enrolments require it, for one thing. But the country can easily do without a state-owned banking service. It has four big privately owned trading banks that provide adequate coverage at competitive rates. Kiwibank was set up to serve only nationalist sentiment and Andertonian distrust. It would, said Mr Anderton, "keep the big banks honest".

Who will keep Kiwibank honest now it aspires to be a big bank itself? Will it use the ultimate security of taxation to crowd out the competition? Would that matter? The answer to the last question depends on the kind of economy that will best serve this society. If it is believed that public welfare is best secured by a dominant state presence in retail banking there can be no objection to the unlimited growth of Kiwibank. But the fortunes of countries that nationalised crucial sectors of their economy would not recommend state dominance.

Banks do much more for the economy than provide a secure repository for savings and a source of house mortgage lending. Banks probably make more crucial investment decisions than any other sector. Prudent business finances itself from bank credit as well as shareholders' equity partly so that its bankers might keep a useful watching brief on its investments.

Kiwibank might not challenge the dominance of the big four, all now Australian-owned, in the foreseeable future at its present rate of growth, but it needs a reminder that there is a limit to the growth it should contemplate. The more like a big bank it becomes, the stronger a future government could find the economic case for selling it. The bank has been in a bind from its beginning: it was always going to struggle to be profitable from services to small depositors. But in reaching for corporate customers it is losing its distinction and threatening to grow too big for comfort.