It’s worth further teasing out some of the problems around the Greens’ proposal for the Reserve Bank to move into mortgage lending, because they offer an insight into the complexities and issues of our financial system.
An “AussieBank” that only provided basic financial services — most particularly access to cash — without the fee-gouging of the big banks isn’t a bad idea — especially in smaller communities that have been abandoned by the big four. In some cases, smaller banks like Bendigo Bank have made a virtue of moving into communities abandoned by its bigger competitors. But, especially in small regional communities, it’s just not viable for any commercially run institution to set up shop there. A taxpayer-backed basic bank is one (of several) policy options for ensuring everyone has access to financial services.
But the Greens don’t want an “AussieBank”, they want a fully-fledged lending institution. And they want the Reserve Bank to be it.
The history of publicly owned banks isn’t a good one — do the Greens, and economists backing them, not remember what happened to the State Bank of Victoria, or its counterpart in South Australia. They failed, owing billions of dollars, and the failure of the State Bank of Victoria (and the Pyramid building society in Geelong) in fact triggered Paul Keating’s move to start privatising the Commonwealth Bank via the rescue of the NSW State Bank — another failing publicly owned bank — in 1990.
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But assuming a publicly owned bank could get into business and mortgage lending without collapsing, there are other issues, exemplified by the Kiwibank experience. Kiwibank was started in 2001 by the then New Zealand Labour government through the NZ Post Office. Currently, Kiwibank has around 7% of the NZ banking market and its rates are little different to those of the big four Australian banks (which dominate NZ). In late 2016, a struggling NZ Post sold 25% shares in Kiwibank to the NZ Super Fund and 22% to the Accident Compensation Commission — basically an asset/cash shuffle between NZ government institutions to relieve growing financial pressures on the Post Office, which couldn’t afford to keep pumping new capital into Kiwibank as it grew its balance sheet. NZ Post had injected around $400 million into the bank – funded by debt — and the New Zealand government clearly didn’t want to provide the new capital directly itself.
This is the issue with a new publicly owned lending institution. At some stage, it won’t have the money to keep funding a growing balance sheet (a point the economists pushing this idea don’t seem to understand). It must obtain new capital from somewhere if it is to make a serious dent in mortgage and business lending markets and pose a competitive threat to the majors. Plus, it will need capital reserves to comply with prudential requirements, and if it makes a loss, it will need a capital injection to cover that. It will also need to pay the Reserve Bank (i.e. itself) for its Committed Liquidity Facility obligations, which are designed to ensure that institutions and the RBA have enough liquid assets on hand that they can operate for at least a month in the event they are cut off from overseas sources of funding. Where does all this cash come from? The Greens proposal would see the RBA effectively borrowing from itself, but in reality it would be borrowing from taxpayers. The only other source is the Future Fund.
Then there are unexpected problems. Last year saw Kiwibank finally owned up to the failure of a major IT upgrade which went slowly sour over three years, and ended up costing the bank more than double the original estimate and saw profits collapse for the last 18 months. By the end of last December, Kiwibank had written off NZ$100 million and spent millions more on increased operating costs.
Running a national financial institution, complying with prudential requirements, preventing fraud and money laundering and protecting borrowers from themselves is hard and expensive work requiring complex systems that come with huge price tags and big salaries to run them properly. Scale, and the ability to suffer large write-offs when things go wrong, is important. That means the Greens idea will come with a huge pricetag for taxpayers just to set up.