With the transfer this week of Kiwibank’s assets to a state-owned company, the New Zealand crown has now taken full control of the bank. At an estimated cost of NZ$2.1 billion, the change of ownership has all the hallmarks of a government bailout.
Former owners NZ Post, the Accident Compensation Corporation and the New Zealand Superannuation Fund could be considered justified in wanting to get out. It was an ailing bank in the making.
The main capital ratio dropped from a healthy 13% in 2018 to 10.5% this June – the minimum level the Australian Prudential Regulation Authority requires banks to meet in order to be seen as unquestionably strong.
Return on equity lingered at around 6% per year, while the bank’s larger competitors offered a return twice as high. Added to this were the high capital requirements announced by the Reserve Bank in 2019 and which are now being phased in.
Kiwibank has struggled since its inception. The government says its takeover will help prop-up the bank in the competitive sector. Fiona Goodall/Getty Images
Too important to fail?
The government has promised to recapitalise the bank to help it grow. Whatever the bailout is called officially, it was the only realistic option. That said, the government cited several reasons for its decision to transfer control.
One was to keep the bank in New Zealand hands. The government has also pledged its full commitment to support Kiwibank to be a genuine competitor in the banking industry. And lastly, the transfer allows “all future profits to stay in the country – unlike the Australian-owned banks.”
But these justifications should not be taken at face value, and it is worth looking at them one by one.
Keeping profits in the country
The idea that keeping profits in the country automatically creates value for New Zealanders is by no means a given.
Kiwibank’s latest reported profits were $136 million, or $25 per New Zealander. This pales in comparison to the profits reported by the big four Australian-owned banks: in total, about $6 billion, or $1,200 per head of population.
Other banks either keep their profits or they pay them out to their owners and shareholders. In practice, these are institutional investors such as pension funds and insurance companies – some of them New Zealand-based.
Moreover, New Zealanders who own shares in Australian banks will receive dividends. Unlike the owner of Kiwibank, these Kiwi investors will benefit directly from their investments.
Lastly, it should be noted that banks have accumulated profits in New Zealand because of the increasing capital requirements. Since 2018, the four Australian-owned banks in New Zealand retained profits worth $12 billion. These would otherwise be transferred to their parents across the Tasman.
Again, these banks contribute to a stable financial system, keep profits in the country and do not need support.
Local ownership
In practice, all New Zealand banks are locally incorporated because of Reserve Bank requirements. Foreign-owned banks operate largely independently from their parents. This has led to inconveniences.
For example, ASB bank cannot freely use new technologies developed by its owner Commonwealth Bank, even though there would be efficiencies of scale if they were allowed to do so.
Also, creditors cannot hold a foreign parent bank liable when its New Zealand subsidiary fails. It’s therefore unlikely that foreign ownership would significantly change Kiwibank’s operations.
But the prospect of foreign ownership could add value. It could encourage its management to step up efforts to grow and compete.
Viability and competition
With a 5% market share, Kiwibank is small and lacks the critical mass required to thrive and compete effectively. Its small size is already problematic, as the bank cannot serve large clients. The government, for example, does not rely on Kiwibank for its banking.
The growth opportunities for Kiwibank are further limited because the New Zealand banking market is tightly regulated and conservative. European banks, for example, are much further ahead when it comes to the adoption of new technologies. Money transfers between European bank accounts are executed in real time, while such transfers still take hours in New Zealand.
The government claims that the banking market has become more competitive since the establishment of Kiwibank. According to Finance Minister Grant Robertson, Kiwibank continues to put pressure on the big four.
That may be so, but other small competitors would do that too. Rabobank, for example, is competitive in farm lending. Other small banks remain well-capitalised and don’t face the same challenges as Kiwibank.
The risks ahead
The most likely way forward for Kiwibank is to further increase lending to riskier clients. Robertson has already alluded to this, arguing Kiwibank could be a disruptor in the industry by focusing on small and medium-sized enterprises.
The problem is that Kiwibank needs the expertise to do this. Adding capital is not enough. And the government will want to avoid Kiwibank taking on too much risk because that will put the future of the bank itself at risk.
On top of this is the risk of Kiwibank’s owner wanting to meddle with its operations. While the present government promises to respect operational independence, who knows what a future government might do.
Finally, there is the question of moral hazard – setting a precedent for other banks. What if one of the other, smaller banks finds itself in trouble? Will the government step in? Again, the decision to save Kiwibank suggests the future could be uncertain indeed.
Martien Lubberink, is Associate Professor of Economics, Te Herenga Waka — Victoria University of Wellington
This article is republished from The Conversation under a Creative Commons license. Read the original article.
42 Comments
That view might play at a barbeque but is is factually fractured. Monthly APRA stats show the real position. The big four Aussie banks have loans outstanding to businesses of AU$¾ tln as at June 2022, and growing. Building societies almost never lend to anything but housing, but banks do and it is equivalent to about a quarter of Aussie GDP. The claim is a failed 'fact'. (similar in NZ.)
Banks have migrated away from lending to productive business enterprises because the risk weights can be as high as 150%. Thus around 60% of NZ bank lending is dedicated to residential property mortgages owed by one third of already wealthy households
The majority of bank credit creation in the UK (same in NZ &US) is not even used for transactions that contribute to and are part of GDP, but instead is used for asset transactions. They are not part of GDP, since national income accountants require a ‘value added’ for inclusion in GDP, not just the shifting of ownership rights from one person to another. When bank credit for asset transactions rises, asset prices are driven up, because the loans do not transfer existing purchasing power, but instead constitute an increase in net purchasing power: money is being created and injected into asset markets. When a larger effective demand for assets is exerted, while in the short-term the amount of available assets is largely fixed, the price of assets must rise. Link
Ultimately there’s no natural income streams to be able to service and repay loans. What you have is capital gains which are contingent on the game continuing. So it’s a Ponzi scheme. says Werner. - https://wire.insiderfinance.io/richard-werner-qe-infinity-707e2c627e03
Show me the numbers on C5 that contradict my claim - as of June 22: total bank lending to housing $333.531m, total lending $543.201m.
$333.531m/$543.201m = 61.14%.
It's unbalanced and unsustainable bank lending to a minority of NZ households which demands a low capital contribution from Aussie bank shareholders.
According to the Reserve Bank, the new capital requirements mean banks will need to contribute $12 of their shareholders' money for every $100 of lending up from $8 now, with depositors and creditors providing the rest.
Kiwi Bank is a ridiculous waste of taxpayers money ... a limp reaction to the giant Aussie banks who dominate our financial markets ... unless the government scales it up with an injection of $ 10 billion or $ 20 billion of capital , it'll remain a joke , a sideline ... it can only grow at the rate it reinvests it's meagre profits ...
We (the family) supported it for many years while owning a small business with good cash-flow. The offset mortgage was a god send.
As time progressed, service levels dropped, got flicked from "business" to regular lemming category, they stopped accepting cheques (my ex-clients were elderly) then eventually shut my local branch.
Spent hours on the phone to talk to a human. Had to drive 20 minutes to deposit cash. Untenable!
Loved supporting NZ companies so switched to SBS and have been very happy.
Of note was one of my ex-patients was involved in a massive financial upgrade some years back. He explained it was a complete con, millions upon millions over budget, absolute fleecing. Why? Government owned, low calibre leadership, lers all engorge ourselves at the tax payers expense.
I'd love to se this bank prosper but have my doubts....
Yes, we had problems trying to open a term deposit with a sizeable amount of cash. "Sorry, we don't do that at this branch, you'll have to find a branch that does term deposits". Thank goodness I decided not to proceed with that and went to one of the big four in the end. Now I don't trust them.
We've got a government who consistently make every big call a bad call. They spend big money on interventions that disrupt business, while being ineffective in regulating business to ensure competitiveness.
Luxon was pilloried for saying nz business is fat and lazy, but what I see is exactly that. KB has performed poorly since inception, yet we see it as a home for $2.1 bn more precious capital - not reading, hospitals, education and hospitals, and housing infrastructure, all of which are failing
The next big stress after the GFC has been the pandemic. Looks to me like like lots of lessons have been earned. Going through this latest stress while keeping the jobless rate so low seems to me to be one of them. Bankruptcies (and NAPs) at record lows too is another lesson/'achievement' learned ?
As a sidenote, based on average Treasury yields at the various points that the Fed has expanded its balance sheet, we estimate that the Federal Reserve’s $9 trillion balance sheet is now underwater. If the Fed was an actual bank, and if banks marked their assets to market value, the Fed would be insolvent. Of course, the Fed doesn’t mark to market, nor have banks done so since the early-2009 market low, when the Financial Accounting Standards Board relaxed FAS Rule 157 (which is actually what ended the global financial crisis – by making bank insolvency opaque). In effect, the Fed has created liabilities for which there is now no corresponding asset, and now finds itself wandering into fiscal policy, which is the sole domain of Congress. Needless to say, nobody cares.
Even without capital losses (which can be recovered by holding the bonds to maturity), the Fed will also go underwater if the interest it pays on reserve balances exceeds the interest it earns on the bonds it purchased. In this case, the Fed can be expected to book any loss as a “deferred asset.” As Ben Bernanke explained before Congress years ago, when the Fed books a loss as an asset, “it is an asset in the sense that embodies a future economic benefit that will be realized as a reduction of future cash outflows.”
What Bernanke meant with that hand-waving gibberish is this: Fed normally returns the interest received on its asset holdings back to the Treasury, for the benefit of the public. If the Fed’s bond purchases lose money, that interest will instead be used to cover losses. See, “it is an asset in the sense that it embodies a future economic benefit [to the Fed] that will be realized as a reduction of future cash outflows [to the public].” Yay. Link -Hussman
No, not just Bonus Bonds - the whole bank.
See: Post Office Savings Bank (New Zealand) - Wikipedia
"PostBank was formed when the New Zealand Post Office (a former Government Department) was split up by the Postal Services Act 1987 into Post Office Bank Ltd (trading as PostBank), New Zealand Post Ltd (a postal services company) and Telecom Corporation of New Zealand Ltd (a telecommunications company). It purchased the assets of the former Post Office Savings Bank.
PostBank was sold two years after it was formed to ANZ,[8] with the PostBank brand being absorbed and finally removed by the late 1990s."
What a load of BS. Anyone who worked in farming got sunsidies
Do you know what the state is mate? It's effing us isnt it, as in all New Zealanders, and it's democratically accountable.
So stick your failed free market evangelist horse shit where the sun don't shine. Nobody gives a toss.
Of course we should own our own banks, of course we should not bleed out billions of dollars a year to Australia.
End of discussion. Grow up.
Your stupid ideological fantasy failed decades ago.
Game over, give it up already.
If we were all given an account at the Reserve Bank to keep our savings then this would remove reserves from the commercial banks and reduce the need for the government to issue bonds, hence no more government debt to fret about.
"But there is a much more effective way to provide a risk-free savings vehicle for workers. The government could create a National Savings Fund, fully guaranteed by the currency-issuing capacity of the government, which could provide competitive returns on savings lodged with the fund.
There would be no public debt issuance (and the associated corporate welfare and government debt management machinery) required". http://bilbo.economicoutlook.net/blog/?p=31715
Bail out is not the correct term, that suggests credit losses eating into capital and this hasn't happened. It looks like they have simply grown at a faster pace than they can generate capital through retained earnings and simply hit the buffer. In theory this would be a good story except that roe is only 6%.
If well run, KB should not be in this position by accident, it had to be within strategy. They have a huge challenge to "cross the chasm" and challenge the big 4 on a sustainable basis. I just don't think they will do it. I mean, would we be happy paying $m bonuses to KB staff? Are we happy if they move into riskier lending? Would we be happy for KB to open an office in London/NY?
Kiwibank doesn't need to 'recapitalise'. Banks can just make money out of thin air, that is the privilege that a banking license gives. Basel rules simply hold up the illusion that banks are financial intermediaries, which they are not.
It provides worse services than the big four in the commercial space, which is the main problem with them.
I don't think that is how it works to generate capital. Banks certainly create deposits by lending but capital is held against lending as an insurance and they must have at least 10% capital over total lending made up of shareholder funds and retained profits. The government can easily give Kiwibank extra capital as its owner and it would just be creating more assets on its balance sheet. There is no financial liability for the government in doing this unless Kiwibank went broke but the government carries a similar risk with the private banks also.
It's one of those things which gets misunderstood and twisted in all sorts of ways, but commercial banks do create new money when they lend. When you borrow $10k to buy a car, that's money which didn't exist before. It doesn't come from reserves.
That said, banks can't just create money out of thin air in order to recapitalise themselves as the original commenter claims.
They do with mortgages. I worked on the software at the backend for those mortgages, they are counted as capital reserves at a very heavily discounted rate (16% from memory). You can lend way more for property because of this. They generate the money in the account by accounting fiction and restating of the accounts payable liability of the customer as a fictitious deposit.
It provides worse services than the big four in the commercial space, which is the main problem with them.
I've literally tried a few: National, ASB, Westpac, Post office bank.
At various times in my life. I have zero issues with kiwibank. Their online systems put other banks to shame.
Award winning in fact.
Payments to other kiwi bank accounts are instant, and pretty snappy with a few other banks.
Fees are lower.
Staff are friendlier.
Tell me how these are "worse services"?
It’s not a bailout it’s a purchase. The issue is that NZPost and the Govt (largely national governments) have been poor owners. The high returns you refer to are an opportunity. But Kiwibank was never adequately capitalised to compete. You bag them but their lack of scale is a function of how much capital they can access. This decision should have been taken years ago when it became clear that NZPost had become a drag on kiwibank and couldn’t support its growth.
Saying Kiwibank has been bailed out is a loaded statement and is disingenuous. Kiwibank is a profitable entity - the govt invests capital and receives a return. There is also a social return via increased competition.
1/ "Australian Prudential Regulation Authority" has no relevance to NZ-owned banks.
2/ Over the years as KWB has grown it has required a number of injections of capital. This was expected from the beginning and is the reason why it was established under NZ Post in the first place, and is why its ownership structure has changed several times.
What has changed is NZ Post's ability to support Kiwibank. This is more a bailout of NZ Post than anything else.
The bank is small but profitable, and according to your own column, meets the capital reserve requirements to be considered "very strong".
The bank was originally owned by the government, as is, ACC and the Superfund.
So that money will go to *government owned entities!*
So please, explain your tortuous logic here?
The government paid itself to become the sole shareholder of a bank owned by its own entities.
In essence, no money exchanged hands, it was simply reassigned.
It essentially cost us nothing.
So - what exactly IS the problem ?
Vague claims that somehow 80,000 dollars an hour flying out of the country via Aussie owned banks is a great deal for NZ, because some wealthy kiwis and NZ owned investment funds may have some shares in them, seem so hand wavy as to be meaningless.
I mean, excuse me, I'm totally self taught here, but I can't help but suspect a classic rehashing of failed propaganda masquerading as economic theory, that literally (should have) died on it's arse with the GFC of 2008.
Alan Greenspan: "There seems to be a flaw in the system" well yes, the system was (and still is) based on farcical propaganda masquerading as economic theory.
- Is this too some sort of dated appeal to that ludicrous deity known as the "invisible hand"?
Correct me if I'm wrong here... But "Bail Out" ? I just don't see it.
It's profitable, it's position is "very strong".
Trying to pitch this as a "bail out" smacks of desperation and political agenda.
Your arguments appear ( to this layman at least) politically motivated, contradictory and vague.
What none of the nay sayers and anti democratic free market BS artists in this thread are admitting in this thread, it's the bloody tax payers that ended up coughing up to bail out banks and large financial institutions, regardless of whether they are privately owned.
All this bullshit rhetoric died on its arse with 2008 GFC.
End of debate you lose, give it up already.
The state ultimately means "the public".
We may choose to own and run any entity we like for our own benefit, and "private enterprise" can try to compete. I don't care.
If private enterprise is always so much more efficient and disciplined ( Bull shit) it'll have no trouble right?
Right? No? Oh is that because those theories are all shit?
Yeah I thought so.
FUndamentals services like banking and infrastructure, should be owned by the public, run at cost plus maintenance and R&D.
The free market can either try to compete, if it really thinks it's so much more efficient, or it can pis off and do something else. Like actually innovate.
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