Banks Higher Capital Requirements A Breath of Fresh Air

Published: Fri 6 Dec 2019 08:11 AM
The Reserve Bank's proposals for banks to hold higher capital ratios is a breath of fresh air and long overdue.
If the Global Financial Crisis, and the Australian Royal Commission demonstrated anything, it was that banks are happy to make questionable decisions to provide their shareholders (in NZ’s case mostly American banks) with maximum profits as long as taxpayers are there to bail them out if they get into trouble.
Party leader Chris Leitch says any extra costs involved in the higher capital ratios should not be passed on to consumers nor should they hurt the economy.
Those threats are simply scaremongering by the banks to protect their astronomical profits and it’s way past time their shareholders took a ‘haircut’.
It should be remembered that every single loan a bank grants to a borrower is created by the bank out of fairy dust.
Banks don't lend money people have deposited with them, nor do they lend their capital. They create new money in the process of lending.
This was confirmed by the Bank of England in two reports it produced in 2014 as well as by the German Central Bank, and our own Reserve Bank.
The Bank of England report noted "Whenever a bank makes a loan it simultaneously creates a matching deposit in the borrower’s bank account thereby creating new money."
This ‘licence to print money’ has seen substantial year on year profit increases by the four big overseas owned banks to the point where they now pull nearly $6 billion out of the New Zealand economy each year - four times more profit than the ten largest companies on the New Zealand stock exchange combined.
The banks are huge money making machines that can well withstand the higher capital ratios the Reserve Bank has put in place without the need to pass any additional costs on to bank customers.
Any moves by the big banks to do so should be met by the Reserve Bank directly creating funds to support government spending on infrastructure, and re-establish a State Advances Corporation and Rural Bank to lend to first home buyers and farmers at rates below those offered by the banks.
Banks already have the ability to skim money out of depositors’ accounts should a banking crisis eventuate. The Reserve Bank’s move to make them increase their capital reserves should make such action much less likely.

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