Bollard on banking

You’ll have to wait until Matt returns from sick leave to get our perspective on the latest MPS, but I do have a few questions about Alan Bollard’s comments on the banking sector:

The banks needed to weigh their responsibility to their shareholders against their responsibility to the New Zealand economy, [Bollard] said. “We think some pressure on the banks will pay dividends,” he told MPs.

Why is it that Dr Bollard thinks banks should decrease their rates on the basis of ‘social responsibility’? Is he asking private companies to act inefficiently, or is there something else going on? Is he just anxious that banks are not responding as strongly as he would like to monetary policy and trying to muscle them into line?

Banks’ rates reflect the operating costs and risks to them of their borrowing. Is Dr Bollard suggesting that the price signals facing banks are not reflective of the true costs and risks of their operations? In that case maybe we need to address some information asymmetries or market rigidities, but that’s not really the banks’ responsibility.

Is he suggesting that banks are extracting high rents from their oligopoly over the sector? Because that would be a job for the Commerce Commission. I wouldn’t be relying on oligopolists to ‘act nice’ and cut consumers a break.

Does he just think that lower rates would help boost consumer spending, which he wants? That just indicates that domestic monetary policy isn’t as effective as it may have been in the past because of banks’ exposure to the international credit market where things are tight. In that case, he’s asking private banks to basically shoulder the risks and costs associated with bolstering consumer spending in NZ. If that’s what he wants them to do then maybe a dividend and appreciation guarantee from the Reserve Bank to the Australian shareholders would be the way to go.

Bollard might think that the banks accepted some implicit social responsibility when they decided to participate in the government’s deposit guarantee scheme. However, since the banks are paying to participate, that can hardly be classed as government generosity and is unlikely to buy a whole lot of goodwill.

Finally, Matt’s argument for jawboning increasing the elasticity of loan demand has to be considered. If the RBNZ Governor starts talking about rates then it brings it to the attention of the media and thus the public. Once you get people thinking about the rate they’re paying, that can make them more price sensitive and increase the elasticity of their demand for credit. Then it only takes one bank to cut their rates for the other to have to follow lest they lose large chunks of their customers. It still comes back to Dr Bollard trying to muscle the banks into doing what he wants, but at least its an explanation that makes sense and has the banks continuing to act in a profit maximising fashion!