I was in town for a meeting earlier in the week, and walking along Lambton Quay I noticed this gigantic advertisement adorning the wall of an office building.
I’ve always quite admired TSB, as the little bank that could. When I paid more attention to these things, they seemed to have innovative products, good technology, and had to stand on their own feet. Oh, and there was the feisty CEO who once told visiting central bankers worrying about pandemic risks and bank preparedness that in New Plymouth they had bigger risks to worry about, turning around as he spoke and pointing out the window at Mt Egmont, which will erupt again.
I guess they have always played the “local bank” line in their marketing to some extent, but it was the brazenness of that billboard that astonished me. Both the message and, even more so, the location. This is central Wellington, and if there is any sort of “ground zero” for commitment to an open outward-oriented economy surely it must be here. Much as I dislike the word, New Zealand’s “globalists” disproportionately live and work here. Within a radius of a couple of hundred metres from this billboard you capture Treasury, MBIE, the Reserve Bank, MFAT, the Ministry for Primary Industry, and the Productivity Commission. Why, the “right-wing” business think-tank the New Zealand Initiative is just over the road – Eric Crampton and Oliver Hartwich must just be grateful the billboard faces away from their offices and they don’t have to see this crass effort every time they look out the window.
Perhaps Gabs Makhlouf, Brook Barrington, Adrian Orr et al don’t get out for a lunchtime walk, but their minions do and they must be the target audience for this billboard – Lambton Quay is always at its busiest at lunchtime.
And firms spend money on marketing presumably because they believe it will work – “work” in this context presumably being drawing in new customers (unless it is just designed to court more Shane Jones Provincial Growth Fund goodies for Taranaki – TSB being owned by a community trust.) Are Wellingtonians really going to be swayed by this sort of crude nationalism and economic illiteracy. It scares me a bit if so.
I didn’t move to Korea and yet the screen I’m typing to was made by a Korean company, and the profits from its design and manufacture presumably accrued to the owners of Samsung. I didn’t move to the United States, and yet the platform this blog uses is (I think) American, and the profits from what I pay for using it accrue to the owners of that company. One could go on – the car, the printer, the TV, the bottle of French wine, or those Californian oranges in the fruit bowl. The jersey I’m wearing is American and the books on the shelves next to me are from all over the Anglo world – there will (producers hope) have been profits associated with each of them. And although there probably isn’t much profit involved, my morning newspaper is produced by an Australian-owned company. And yet, like 400000+ others I live in Wellington.
It is trade, and it is a good thing – usually mutually beneficial, and if there are occasional exceptions to that presumption, you wouldn’t expect them to be successfully highlighted down Lambton Quay (even if too many public servants are all too keen on the possibilities of clever government interventions in our lives). I didn’t move to Australia, and yet the shareholders of ANZ invested some of their savings to provide banking services to New Zealanders like me. That was good of them – in fact the earliest progenitors of ANZ were setting banking services here in 1840 (10 years earlier than the founding of what became TSB) when there wasn’t much organised here at all. The profits from those transactions accrue to the shareholders (many but not all of whom are in Australia), because they provide the risk capital that underpins the business. And while the TSB talks of the profits “moving to” Australia, in fact successful businesses – that find willing purchasers of their services – typically reinvest many of the profits in the business, right here in New Zealand. Banking is a big business – some might think too big and views will differ on that, but that isn’t the line TSB is running – so it takes lots of capital. That will, often or even typically, mean generating quite large profits – the returns on that capital.
(Although it is a bit of a distraction, one could note that of the five New Zealand owned banks, four are directly capital-constrained by their ownership structures – Kiwibank being government-owned, TSB owned by a community trust, and SBS and Coop being a (modestly-sized) mutuals – and only one of the NZ-owned banks manages a credit rating better than BBB. Not one of those institutions could even begin to displace the major players, and the risks facing New Zealand would increase if they were to try.)
TSB’s billboard proclaims to sophisticated (as they like to think) Wellingtonians that TSB is “proudly supporting New Zealand”. This sort of crass attempt to play some sort of crude nationalist card supports no one other than themselves – and perhaps the Shane Jones-isation of New Zealand politics. It diminishes, and reflects poorly on, those who commission the advert, who surely know better. They should stop trying to gull New Zealanders with some weird autarkic vision that, if followed through on, would be bad for a big country, and totally crazy for a small one.
I once worked for someone who told me his maxim was that from choice he would always use an overseas provider if he could (as I recall this was in the Ansett vs Air NZ days) to keep the pressure on the New Zealand providers to work harder and produce excellent products and services. I never went fully along with him, but having seen that distasteful TSB advert on Tuesday, it actually gave some small pleasure to be in an ANZ branch yesterday and to receive friendly, helpful, accommodating service on the small matter I wanted dealt with. I’d say I’d be happy to have seen the resulting profits accruing to Australian shareholders, but they were so helpful they even waived the small fee on the matter in question – lifetime customer value and all that I suppose.
As for TSB, they really should do better. I hope Wellingtonians passing that big advert look on with disdain, grateful instead for the opportunities that foreign trade and investment – in both directions – created, and continues to create, for New Zealanders. Or would we welcome British consumers being regaled with billboards proclaiming “you didn’t move to New Zealand, so why should the profits on that leg of lamb?”.
croaking cassandra 
I have a small account with the TSB just because it’s an NZ bank. Also, currently, it pays better rates on short term deposits.
You’re correct from a straight economic rational point of view; but many people believe that there’s more to life than ‘rational’ decisions and many of us believe in supporting the local producer.
Failure to understand that by liberal globalists lead to Brexit and Trump.
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This is why the smaller banks get half the profit margins that the Australian banks have. In order to lend you need to try and compete with the Australian banks that have control of most of the $173 billion in deposit savings. So a competing bank has to offer a higher deposit rate and capture the savings and subsequently to lend out at a lower lending rate with overall profitability squeezed in between.
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Clearly TSB believes this will resonate with New Zealanders. You suggest it’s an appeal to nationalism and you may be right. But there’s another possibility, one I’ve tried to highlight on Croaking Cassandra since you started the blog.
A free market isn’t necessarily a competitive one.
In some respects, New Zealand, because of its size, geography and distance, lends itself to monopolistic competition. Whether this is in automotive fuels – an investigation is currently underway – telecoms, electricity, supermarkets, ports/airports and banks.
New Zealand’s banks, dominated by the Big 4 Australians, are highly profitable. Are they profitable because they’re efficient or are they profitable because they’ve enjoyed a comfy relationship with Orr, Wheeler, Bollard, Ardern, English, Key and their predecessors?
I would argue that there is a lack of competition in banking services in NZ and at least part of their profits results from this rent-seeking behaviour.
Unlike telecom, electricity and more recently the government is reviewing the dairy industry and now petrol, there’s a distinct unwillingness on both sides of Parliament to do any sort of review of banking competition in New Zealand.
New Zealanders may not be able to verbalise it but I believe there’s a distinct unease about the banks and an awareness that these super-normal profits are repatriated to Australia.
Maybe TSB is simply tapping into this?
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You may be right Peter. I’m still surprised they think the argument will work in central Wgtn. Less so if they tried this approach in Hawera, Masterton, or even (say) Upper Hutt.
I still remain a touch sceptical of your story re banking because there are few barriers to entry (nothing really akin to say the petrol terminals that constrain Gull), and yet no market-based challenger has successfully taken on the NZ banking market (whether pre 2008 or since). How do reconcile your story on banking with that observed experience?
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The effective barrier to entry is access to local savings. Australian banks have grown in NZ by acquisition and as a result control most of the $173 billion in local savings. It is rather difficult to compete with the Australian banks for that pool of savings. The NZ government does not have a deposit savings guarantee that the Australian government provides to Australian banks. As a result people feel that their savings are safer with an Australian bank even though they may be local subsidiaries and therefore limited liability but the Australian government would not likely allow a Australian banks subsidiary to keel over and affect the rest of the group anyway.
If you look at the capital structure of the ANZ bank NZ Limited, it has a Capital structure of $9 billion. Even if a competing bank does decide to compete, it would not be raising more than ANZ $9 billion in capital which then restricts its lending to $9 billion in an Australian dominated Household lending of $173 billion.
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Unlike the big four The Co-operative Bank uses retail (savings deposit) funding for all its funding requirements. However retail deposit funding is also important for the big banks.The Reserve Bank introduced the core funding ratio (CFR) in 2010 to reduce New Zealand banks’ reliance on short-term offshore borrowing/funding. The CFR requires banks to meet a minimum share of their funding from retail deposits, long-term wholesale funding and/or capital. The minimum CFR for each bank – on a daily basis – is 75%.
https://www.interest.co.nz/personal-finance/97224/co-operative-bank-ceo-david-cunningham-says-sub-4-home-loan-rates
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Yes but the argument cuts both ways. If I restricted myself to NZ books I’d be sorely diminished, and big businesses pandering to this sort of economic irrationalism only feeds bad politics.
I remain a supporter of Brexit (mismanaged as it has been) and don’t believe that the explanation for Trump or Brexit has anything much to do with open trade and investment flows among advanced market economies. (I leave China to one side here – all sorts of different issues, and not relevant to the specific TSB one).
I’m not disputing that all sorts of questionable ideas are out there. Just (a) wary of encouraging them, and (b) – my real point – surprised they think it works even in liberal central Wgtn.
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Given the size of the capital outflows, this represents a major leakage of wealth – an effective tax on New Zealanders that could easily amount to up to 1% or GDP – and the PV of this on New Zealand’s wealth is significant.
I don’t think it’s necessary for New Zealand to go through the turmoil of the Haynes Commission – their findings are being implemented here – but perhaps it’s time the Commerce Commission took more interest.
This would fit with your arguments about the LVR and financial efficiency.
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Michael,
I’d just come back to the simple point, a free market doesn’t necessarily mean a competitive one.
Business will always look to game the system and the formation of an oligopoly or monopoly is a natural desire of any businessperson.
I think TSB is tapping into this unease. It doesn’t necessarily mean a lurch towards Muldoonism…
But interesting to see nonetheless
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I think there are significant barriers to entry in banking.
In the longer-term, Fintech is a likely source of increasing competition for the local banks with companies like Transferwise setting up. But you’d be surprised how many SMEs do their FX at retail spreads.
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An interesting question (barriers to entry) to explore at some stage. Kiwi started from scratch, with signif implicit govt subsidies, but after all these years doesn’t seem super-profitable. But there has been no other big international retail bank try. One could take that either way – how hard it is to get in (but Kiwi has built quite a business) or that the returns on offer actually are not materially above the cost of capital people would require.
(Entirely agree with your other point about free markets not necessarily being a very competitive one.)
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Michael, I’m somewhat bemused that you wrote “Are Wellingtonians really going to be swayed by this sort of crude nationalism and economic illiteracy. It scares me a bit if so.”, whilst as far as I can tell ignoring the far greater economic illiteracy displayed for the whole world to see by the publishing on the Internet by the NZ Treasury and RBNZ of a public consultation paper entitled: “Safeguarding the future of our financial system – The role of the Reserve Bank and how it should be governed – Phase 2 of the Reserve Bank Act Review”. Here is the URL for that paper:
Click to access rbnz-safeguarding-future-financial-system.pdf
Here is an excerpt from page 14:
“Intermediation – the financial sector sits between savers and borrowers, using funds from savers (e.g. through deposits) and lending them to those who wish to borrow (e.g. households and businesses). This intermediary role allows the financial sector to pool resources so that a number of small deposits can be used to make a larger loan. Financial firms also create financial products that meet the needs of investors and borrowers, so capital (society’s accumulated wealth) can be allocated to its most productive use.”
Here is an excerpt from page 17:
A bank is a financial intermediary that takes customer deposits (and other sources of funding such as equity and wholesale market debt), and lends them out as loans and mortgages. Banks also facilitate the transfer of money by providing payment services. In New Zealand, to use the word ‘bank’ (or any derivative thereof), a financial firm must register with the Reserve Bank. There are 26 registered banks in New Zealand, but the four largest banks – all Australian owned – account for 87 percent of bank assets. New Zealand’s banking system is relatively small in dollar terms, but similar to the average of other OECD countries when compared with the size of the economy. In March 2018 the banking system’s assets were worth $527 billion, equivalent to 186 percent of GDP.
The two excerpts reproduced above show without a shadow of doubt that certain employees of the NZ Treasury and the RBNZ – who should know better – have a false understanding as to how the banking and monetary system actually works, and therefore have no business advising a kindergarten – let alone our government – on anything to do with finance and banking! That the Treasury and RBNZ are advising government on the regulation of the banking industry is, IMHO, farcical. The vice chancellors of every one of our universities should hang their heads in shame, for by and large it was their supposedly learned employees in our universities’ departments of economics who taught the fake knowledge of neoliberal, mainstream macroeconomics to those misguided Treasury and RBNZ employees!
There are two other passages of the Treasury/RBNZ document that also falsely describe that banks are financial intermediaries.
Absolutely nowhere in the Treasury/RBNZ document referred to above is there any mention of the fact that banks are money creators. Throughout, banks are presented as being mere financial intermediaries.
Michael, I suggest that you call upon Jacinda Ardern and Grant Robertson to instruct the Treasury to withdraw the afore-mentioned consultation document and correct the false information that it contains.
But first, you will need to educate both of them as to the true role of banks as money creators – for guess what? They each believe the nonsense that banks are financial intermediaries!
And please, while you’re at it, educate our mutual friend getgreatstuff, because from his response today, it is plainly evident that he still believes the same nonsense!
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Peter
Too bad I didn’t get your comment earlier. I’ve just been in a consultation meeting at Treasury on the contents of that document, and had forgotten about that money creation slip in the document. I will, however, pass your comment on to those dealing with the document.
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Peter Morgan, perhaps you need to consider that money creation by banks via lending does occur due to the separate contracts that they have full discretion to write up with borrowers but they must have to balance out with the deposit savings that they receive which are separate contracts with depositors. Think of a bank as a wholesaler where they pool money from depositors in order to lend out borrowers.
Please for the sake of New Zealanders and the embarrassment of all economists, do not continue to present economists one sided view of financial systems without any knowledge of financial markets.
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Copy of ANZ NZ Limited Financial Statements. Please read and try and understand their Balance Sheet. This is accounting 101. Every financial entity must achieve a balance sheet that nets off to zero. There is no money creation lending in isolation of savings deposits received. Any shortfall needs to be met by external borrowing.
https://www.anz.co.nz/resources/9/0/902b57b7-24e0-4af3-9a74-8fbc074a3b83/ANZB+DS+Sep17.pdf?MOD=AJPERES
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getgreatstuff, please, if you are an accountant as I suspect that you are, do not for the sake of New Zealanders and the embarrassment of all accountants, continue to display your ignorance of the fact that banks are money creators and not financial intermediaries.
And before Michael intervenes again and this time bans one or both of us from this blog, let that be the end of our taking swipes at one another in public!
You are very welcome to debate with me one-on-one, and so is everyone else who posts on this blog, but please let’s do it in private, via email. My email address is pjm.forensic.eng “at” gmail.com
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Peter Morgan, that is why when a receiver is appointed in any liquidation of a financial entity, they never ever appoint an economist. The lack of understanding in financial markets and financial statements is unbelievable.
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Not too sure if Peter J Morgan the economist is the same person as Peter J Morgan the mechanical engineer. My sincere apologies to economists if Peter J Morgan is actually a Mechanical engineer who is a wannabe economist.
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Absolutely nothing good in the Free Slave Agreement with the Han Chinese dictatorship, unless you’re a traitor or a colonist, of course.
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Since when have ads been either particularly truthful or deal with the real world. It is all PR gimmicks and I think you are taking it all far to seriously. The level of money spinning across the Tasman has been in the news we many Kiwis complaining about it. Whether it is a valid claim has nothing to do with it, people are annoyed. TSB, a minnow in the banking world, has taken the opportunity to poke the big boys with a sharp stick. It is a nice piece of tongue in cheek fun and well played by them.
The success of any ad is on how many both notice and talk about it. Whether for or against, it needs to be seen and talked about. Your article would seem to prove that it has been a success for the ad agency.
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The post was intended to be deliberately a little OTT, but nonetheless what advertisers think works, or is acceptable in a particular location, is still quite telling. Drapping a half-naked model over a car and somehow drawing a connection to TSB would simply not have been done – or worked – in that location. And, as I noted, my surprise is less that they play with NZ card, as that they play the anti-Aus one on such a scale in that particular location.
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Fifty years ago my sister took a summer student job with a branch of Barclays bank in London. She told me the manager had a heap of customer cheques in front of him that would if cashed cause the account to go into deficit. He sorted them akin to separating sheep from goats saying things like “we will bounce this one – he needs to do more thinking about his spending”. This was risk assessment by a local manager who new his customers and their business. In those days even the biggest bank was effectively a collection of little local banks. The downfall of banks was the invention of the computer which permits centralised control at a transaction level. It is noticeable that where businesses have dealt with local banks the businesses have thrived especially with successful exporting. That describes the USA until recently and Germany today.
We cannot un-invent the computer but ANZ could keep its managers in place for more than a few months and give them more power.
So NZ needs a banking system that is atuned to local conditions; as you say it doesn’t matter who owns them. Then maybe businesses would be supported through hard times rather than abandoned just when they need money (GFC) and maybe more investment in business and less in property?
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I was quite surprised how much discretion a ANZ senior manager does have. A friend of mine needed to borrow for a new operation he set up. He could not get any loans from any other bank as he did not have a verifiable income, until another friend introduced him to a senior ANZ business bank manager with the authority to sign off on $2 to $3 million loans without passing it through the Risk lending department.
He just said to my friend that the ANZ bank would accept a forecast of income, any forecast of income, if the business is less than 6 months new. If it is a company older than 6 months, then transfer the ownership of the business to either mum or dad and draw a fixed salary from the business. The ANZ would lend on that salary. Of course some equity is required in the form of a house.
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I’m not the least surprised; go a little overdrawn and they cosh you, put your feet in a concrete block and drop you in the ocean, borrow for an average house purchase and they drown you in paperwork, borrow millions and they become friendly, tens of millions and they get out the sherry but if you can persuade them you are a military dictator of a shady South American country (there are fewer than there used to be) and then they force money on to you whether you need it or not.
I hope they never introduce criminal punishment for hate crimes because I hate banks. I realise it is irrational and the bank staff I meet face to face are invariably pleasant. I think my hate is fostered by advertising that is invariably cringeworthy. (Not too fond of computer printers either) but now corporations are legally people and NZ even has a river that is a legal person it is getting difficult to express hate publically. On other blogsites this message would quietly disappear.
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getgreatstuff, I see that despite my suggesting that we engage in a civil discussion privately via email, you have made two more derogatory posts whilst continuing to hide behind your nom de plume.
Your illustrated lack of understanding of the money creation process of banks would be unbelievable if it were not for the fact that you are a mere accountant. You can undoubtedly count and account for money, but it is plainly evident that you have a false idea as to how what we use as money is actually created.
I have the distinct impression that your ego is bigger than your brain!
C’mon, Michael, it’s time you stepped in again, otherwise this exchange may get ugly, as it did on a previous occasion. Perhaps if you simply explained to getgreat stuff that he is wrong, he would stop his nonsense.
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I think you can both just stop. If not, I will simply delete future comments along these lines.
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Thanks, Michael. As I said before, I would prefer that gretgreatstuff and I had private communications via email, but so far, he hasn’t availed himself of the opportunity I so willingly provided.
Best regards
Peter
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Sorry, not too sure why I would debate finance with a Mechanical engineer who has read some articles to reach the wrong conclusions?
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Getgreatstuff, you were asked by Michael to stop, and yet you have made more derogatory comments.
However, the last one caused me some amusement, as it showed that your command of English is not too good.
I did not read some articles to reach the wrong conclusions. Rather, I have read a vast array of articles, and whole books, to arrive at a proper understanding as to how the banking and financial system actually works.
I think you must have read some articles AND reached the wrong conclusions.
When I began to study economics — in 1973 I passed both 3-hour papers at The University of Auckland for the ACA qualification — I realised that much of mainstream economics with regard to money and banking was, and still is, a load of nonsense. Prof. Steve Keen has written books explaining what in mainstream economics is nonsense, and I recommend that you read one or two of them.
In my post above, I illustrated the ignorance of certain Treasury and RBNZ officials. In my opinion, the reason for their ignorance is that more than likely, they were taught nonsense when they were university students, and maybe weren’t quite bright enough to realise that they were being duped.
Just ask Michael, and hopefully he’ll explain to you that both he and I are correct on these matters.
I look forward to receiving your response by email to the address given above.
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PJM, Say we use the ANZ as an example. Net asset position is $13 billion. Property market goes down the gurgler and people start losing jobs in a NZ recession. ANZ loan assets suffer a $50billion impairment and has to be written off. Bank is now insolvent by $37 billion ie net asset position is now -$37 billion. What do you propose as a solution to the RBNZ under your bank creates money scenario?
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To compound the problem, now cash depositors take fright and want to withdraw from the bank their $101 billion savings deposit from the bank. Again, what is your proposed solution under the bank creates money scenario?
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getgreatstuff, my “bank creates money scenario” is not a scenario. Rather, it is merely an accurate description as to how the banking and monetary system actually works.
Michael Reddell himself has attested to the accuracy of the description. In fact, back in 2001 when he was a senior economist at the RBNZ he gave a speech at Victoria University of Wellington as part of the New Zealand Banking Reform Debate, taking the affirmative, that private banks should create almost all New Zealand’s money supply. Here is the URL for Michael’s speech, which is still on the RBNZ website: http://www.rbnz.govt.nz/research-and-publications/speeches/2001/speech2001-08-27
getgreatstuff, you are not just attacking me — and I’m well aware of your disdain for someone who in your eyes is a mere mechanical engineer whom you believe knows much less than what you proclaim to know about the workings of the banking and monetary system — you’re simultaneously attacking Michael Reddell.
So far Michael, being the gentleman he undoubtedly is, has refrained from putting you out of your misery (or should I have written ‘putting you in your place?).
Anyway, the scenario you have described, where ANZ finds itself insolvent by $37 billion, and then its “cash depositors take fright and want to withdraw from the bank their $101 billion savings deposit from the bank”, would bring about the classic dilemma for the RBNZ. Should it stand back and let capitalism run its course, whereby most likely all the banks would fail/fall like dominos (because the whole banking system is a systemically unstable house of cards), or should the RBNZ intervene and rescue ANZ in the belief that the cost to New Zealanders of doing so would be less than the cost to New Zealanders of allowing the nation’s banking system to crash and burn, which would also bring down the nation’s whole electronic payments system?
As I explain in my article describing how the banking and monetary system actually works, the reason for the possibility of the above-described dilemma can be traced back to the passing in England of the Promissory Notes Act 1704, (just three years before the formation of the United Kingdom of Great Britain) which made promises to pay (for that is what our present ‘funny’ money actually is) negotiable.
After 45 years of studying the present banking and monetary system, I have come to the conclusion that the best solution to the dilemma would be to switch the system overnight to a Sovereign Money one (better described, in my view, as a Democratic Money one) in which banks cease to be money creators and actually become financial intermediaries. As such, they would take in deposits, aggregate them, and lend them to borrowers, whilst at the same time making an honest living from the differences between the interest rates that they paid savers and the interest rates that they charged borrowers. In such a system, no bank would be too big to fail, and the payments system would be a public utility run by a SOE. Existing bankers would carry on their vital role of allocating capital, but their privilege of creating it would cease.
For a more complete description of what a Sovereign Money banking and monetary system is, I once again suggest that you — or anyone else reading this blog — send an email to me at pjm.forensic.eng ‘at’ gmail.com requesting that the latest version (for it is a ‘living document’) of my article be emailed to you.
I remind readers that an argument is an exchange of ignorance, whereas a discussion is an exchange of knowledge. Let’s have a discussion about this!
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‘Take deposits and aggregate and lend to borrowers. Too big to fail”? Looks like how our current banks operate today? Does not change the scenario where borrowers are not able to meet their obligations which results in bad debts. Depositors still want their money back. Sure sounds like it does not get too big to fail. Same scenario that the RBNZ has to deal with. No difference.
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Privilege to create is within anyone’s grasp. It is also called a sales contract between a seller and his customer. In the banks case they write a loan contract between the bank and its borrower. Not a big deal. Anyone who runs a business has that privilege to create.
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“Take deposits and aggregate and lend to borrowers. Too big to fail? Looks like how our current banks operate today?”
Oh getgreatstuff, you must be a troll!
I’m sorry, but you have proven yourself to be far too ignorant and intransigent to have an intelligent discussion with, so this is my final comment:
Arrange to meet with me, and I’ll lend you a $20 RBNZ note. In exchange, you hand me your IOU for $20.
Then come with me to the nearest Countdown and watch me try to buy $20 worth of groceries and pay with your $20 IOU. If Countdown refuses to accept it, you pay me $100.
Would that be a fair demonstration that you’re a BS artist?
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Peter, looks like you are getting rather flustered unnecessarily and having difficulty understanding the difference between what you are saying and what is actually happening.
In your latest scenario of a IOU in exchange for $20, you are getting into the derivatives market which is quite separate from aggregating savings and on lending activities of the bank. Yes the derivatives market is off balance sheet but in this market you can swap currencies and interest rates. You can even exchange IOU with IOU. This is a particularly difficult area for the Reserve Bank as it involves a domino effect by banks that fail outside of NZ.
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Don’t forget that when the bank draws up a IOU contract for you to buy a house, there is a settlement that occurs. Ie digital cash moves between bank accounts of the buyer and the seller. The same with your IOU, at some point there is an expectation of a cash settlement. That cash comes from mostly savers and in your example, I will need to have cash ready to settle that IOU, pretty much the same way that a bank works in settlements of house purchases after the loan contract(IOU) is drawn up between the bank and it’s customer. And yes, if I have a pre-arrangement with Countdown to accept my IOU, they will accept it from you. This is also how the cheque system works.
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Michael, as you can see above, getgreatstuff has again resorted to derogatory comments, and has also introduced a few red herrings, so please do what you said you’d do to end it.
Evidently, getgreatstuff prefers to believe that he is correct and that:
1. The 1956 New Zealand Royal Commission on Banking, Monetary, and Credit Systems
2. The Bank of England
3. Economist Adair Turner
4. Economist Prof.Steve Keen
5. Numerous other economists, world-wide
are all, like us, incorrect in insisting that banks are money creators, not financial intermediaries
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Not incorrect, just read without an understanding that all Financial entities ultimately at it’s very core must have an audited set of Financial Statements. Included in that set of Financial Statements is a balance sheet.
Equity plus retained earnings = Assets – Liabilities.
Whatever money creation ie the freedom to write loan contracts must be balanced and ultimately nets off to zero. The nuts and bolts of the mere accountant. Failure to balance the books usually leads to a conviction and jail sentence.
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“Banks fund their lending by raising funds in the form of (savings)deposits, debt securities, and loans. From 2007, the greatest growth in funding was in the form of (savings)deposits, up 92% at March 2017. However, in 2017 (savings)deposit growth slowed. This partly reflects households making fewer additional (savings)deposits in banks, from $14 billion in 2016 to $11 billion in 2017. With lower (savings)deposit growth, banks borrowed more in the form of debt securities in 2017 than they did in 2016.”
https://www.interest.co.nz/property/97285/stats-nz-says-property-assets-owned-kiwis-increased-value-more-300-billion-over-10
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Hello from Wollongong Australia from one raised in Wellington NZ. The article and comments are of interest.
Also TSB have another billboard that says “You bought in Wellington, not Wollongong. Your bank’s profits should stay here.”
In Australia, each of the four big banks (and possibly their New Zealand subsidiaries) have been shown by a Royal Commission to have been behaving badly in recent years. To me, this includes “milking” trans Tasman currency movements with high fees.
For some time, some Canadian bank’s have offered their Canadian customers the option of opening an account in US dollars. It would be a help to both many individuals and businesses if, for example, ANZ (one of the big four Australian banks that also operate in NZ) in New Zealand could offer NZ customers the option of opening an account in Australian dollars, and Australian customers the option of opening an account in New Zealand dollars.
Closer Economic Relations between Australia and New Zealand has been going for over 30 years. It would be further assisted by easier and less costly Trans Tasman currency movements
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Thanks for the comments.
I’m pretty sure the Aus banks here offer foreign currency accounts. I used to have a USD one, so I assume they offer AUD ones.
Re TSB, it only occurred to me later that in fact almost all their profits stay in Taranaki (certainly all the dividends) so taking their own argument to ridiculous extremes why should anyone outside Taranaki bank with them.
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