Banks attacked for "profit gouging" and misleading farmers on guarantee costs (Update 2)

Business lobby group, The Productive Economy Council (PEC), has accused banks of profit gouging and manipulation of their clients' behaviour following the increase of long term mortgage rates over the past few weeks. Meanwhile, Federated Farmers said there was evidence banks were telling farmers that the rise of long term rates was due to the government guarantee scheme. (Update 2 to include response from Westpac.) The PEC, led by former Hi Growth Project (Ministry of Economic Development) Trustee Selwyn Pellett, said it thought banks were "now manipulating the behaviour of their clients by talking up long term interest rates and thus signalling that further interest rate cuts are unlikely." Pellett said he agreed with Reserve Bank Governor Alan Bollard's statement yesterday that the rises in long-term interest rates were unwarranted. Bollard's statement referred to wholesale interest rates and was not specific in criticising banks for putting up mortgage rates.

"The Minister of Finance has instructed the banks to pass on reductions. The Prime Minister has requested 'honourable' behaviour. Dr Bollard has warned them not to underestimate the amount of anger out there in the business community, yet the banks have ignored them all. The gouging continues and the banks' margins increase completely unchecked," Pellett said. "At a time when we really need 'our' bankers to be doing their bit to help the economy, we are clearly discovering that they are not 'our' bankers at all. Home country bias seems to be affecting the decision making of the banks here and that's not in our national interest," he said. "Yes, we must face a slightly higher risk premium, since our foolish property policies have left us one of the most indebted countries in the world, but that margin should be small compared with what we are paying now." Federated Farmers said that confusion had risen among farmers who were refinancing, due to what they were being told by banks about the costs of the deposit guarantee scheme and how this affected interest rates. "Anecdotal evidence suggests that farmers are being told by bank staff that interest rates are increasing due to the government guarantee," Federated Farmers economic spokesman Phillip York said. "This is adding some confusion to negotiations with farmers when refinancing or establishing new facilities. Federated Farmers urges the banks to be clear on the real nature and cost of the guarantees with clients," York said. "There are actually two guarantees. For our main trading banks, the cost of the guarantee may not be as great as some think or are being led to believe," York said. The Federation welcomed Bollard's comments yesterday, saying: "RBNZ governor Dr Alan Bollard's uncompromising statement makes it abundantly clear that the recent rise of long term interest rates is doing the economy a massive disservice." "Dr Bollard has delivered a virtuous double punch nailing both the dollar by a cent and dropping interest rates," York said. "The Federation contends that the banks' recent hiking of interest rates has built already fat margins and by encouraging borrowers into fixed rate loans, are locking in high interest rates. With many farm businesses struggling in the face of the global recession and rising import prices, this trend is a major concern to Federated Farmers." Pellett and the PEC also called on the government to give Kiwibank some fresh capital to allow it to create tension between banks in New Zealand. "(O)ur only New Zealand-owned bank (Kiwi Bank) has its hands tied right now due to lending ratios. But if its owners, the New Zealand Government would inject some fresh capital into it then we might be able to create some positive tension in the business lending market and see some realistic pricing," he said. "(I)t's time we moved to regain economic sovereignty, which we have clearly lost." "We have a bank that can address the home country bias and it should be recapitalised now to allow a fair fight and allow our productive companies to get the funding they need at a price they can afford." "A continued failure to address bank gouging will result in ever more job losses and company failures." Westpac responded saying the costs of the retail and wholesale deposit guarantee schemes were partial contributing factors, but that critics who are focussed on price should welcome the banks' ability to keep lending. "There are many factors that have combined to result in funding being both more difficult to access and more expensive," Westpac's head of Agri Business Dave Jones said. "The costs of the retail and, if used, wholesale deposit guarantees are partial contributing factors but we try to communicate the complexities that include the significant funding cost increases associated with generally attracting retail and wholesales funding in a competitive local environment, virtually closed international environment, and at a time in which risk has been significantly repriced," Jones said. "The reality is we are in a different world than the same time last year and that needs to be recognised. The ability to keep lending should be considered and welcomed by critics currently focused on price," he said. New Zealand Bankers Association spokesman John Bishop said he did not want to comment because these were commercial matters for the banks. We have contacted the other banks for comment.