The O'Brien Column: Where does the money come from for the people's bank?

Friday 10th March 2000

The report about a proposed "People's Bank" that Deputy Prime Minister and Economic Development Minister Jim Anderton expects to receive at the end of March should be an interesting document.

It should also consider some specific nuts and bolts issues of which a fair number of the "people" probably have a hazy knowledge.

Any person can set up a company to specialise in finance, including several activities which may come within the ambit of "banking," provided they act in accordance with the provisions of the Companies Act, Securities Act and any other relevant laws.

It is a different matter to become a "registered bank" under the supervisory umbrella of the Reserve Bank.

Such an organisation must have a minimum capital of $15 million and then maintain capital adequacy ratio guidelines. They are known as tier I and tier II risk-weighted adjusted capital. In broad terms, tier I comprises paid up capital, any perpetual, fully paid up, non-cumulative preference shares and audited reserves.

Those funds are designed to cover a bank's risk-weighted exposures and should be 4%^ of such exposures.

Tier II capital is tier I, plus subordinated debt, revaluation reserves, unaudited retained earnings and general non-doubtful debts. That capital classification absorbs losses in the event of a winding-up when tier I capital is exhausted.

Any proposed "people's bank" should have little difficulty in meeting those requirements, provided somebody - presumably the government and/or other organisations - is prepared to put up the initial capital.

Once the capital is available the bank has to be administered and staffed and policies set. Physical administration, in the sense of outlets would be no great problem, if a proposal to use New Zealand Post facilities were put in place.

Staffing raises other issues. The upper levels of a bank's staff do more than receive deposits, process withdrawals and give general advice about the organisation's products and systems. They need a capacity for credit analysis, assessment of lending propositions and general experience in overseeing the broad structure of what can be a complex financial institution.

Finding the appropriate staff for the various levels of a bank's administration is not an insurmountable problem, even in New Zealand's relatively shallow pool of finance personnel, but it is an issue that has to be addressed.

It is particularly relevant to the lending side of a bank's business, a side that can have bigger fishhooks than the borrowing side (borrowing in the sense that a bank effectively "borrows" funds from its accountholders in the form of deposits, whether at call - cheque accounts and so on - or for fixed terms).

Some of the overseas-owned banks operating here that have incurred Mr Anderton's anger got into serious difficulties in the early to mid-1990s when the glory days of financial frenzy ended with the speed of a tropical night's onset.

They were forced to slash vast amounts off the value of loan portfolios through substantial provisions for bad debts and solid increases in provisions for doubtful debts.

The fallout in respect of people went right through the banks that faced the biggest problems, including board members in some cases.

Any proposed people's bank would not be immune from errors of judgment in relation to credit analysis and business assessment just because it was the brainchild of a cabinet minister.

We then come to the tricky question of the bank's structure. A consortium of a small number of shareholders, including or excluding the government, could be one form.

A state-owned enterprise (SOE) could be another but that might lead people to the conclusion there was an implicit, as opposed to a formally explicit, government guarantee.

Would some form of trust be an appropriate structure? We have been down that track in the past when there were regional trustee banks throughout the country. Those days have gone but they could be brought back on a national basis.

A consortium of other organisations - building societies and credit unions have been mentioned - could have potential for conflicts of interest.

People who think "their" proposed bank would immediately retain substantial profits in New Zealand while slashing customers' fees should have another think.

There will be startup costs and the bank would have to earn its revenue from somewhere, whether through interest charges or some way of retrieving administration costs.

Reduced margins would be the only alternative. That brings in the issue of whether a lower return on the capital investment would be an acceptable and appropriate offset against the presumed benefits to customers in giving them a home-owned choice in the banking industry, apart from the TSB and the recently reorganised building societies.

Those are some of the questions to which answers will have to be found before an efficient, properly-structured people's bank opens its doors.

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