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Banking and finance

by David Tripe

In the 2000s it is hard to function without a bank account, and almost everyone has one. There are many banks and other financial institutions in New Zealand, but all of the major banks are Australian-owned.


Banking and finance to 1984

First banks

New Zealand’s first trading bank was the Union Bank of Australia, which opened in 1840 on the Petone foreshore. It was one of the forerunners of the Australia and New Zealand Banking Group (ANZ).

The country’s first surviving trustee savings bank (which ultimately became ASB) was started in Auckland in 1847.

During the gold rushes of the 1860s four banks – the Bank of New Zealand (BNZ), the Bank of Australasia, the Bank of New South Wales and the Bank of Otago – all opened for business. The BNZ still survived in the 2000s, while the others became part of Westpac or the ANZ National Bank group.

Banking law

Legislation shaped New Zealand banking and finance from the beginning. An act of Parliament was needed to establish a trading bank up until 1987, while savings banks were also regulated. Laws restricted what banks could do, with the aim of safeguarding customer money. Trading banks mainly financed business and provided cheque accounts for individuals, while savings banks were restricted largely to lending to individuals.

Government involvement

The government took a shareholding in BNZ in 1885. In the late 1880s the bank got into financial difficulties through a combination of poorly performing assets and bad debts. In 1890 UK shareholders forced a shift of the bank’s headquarters to London, but its situation remained precarious. In 1894 the government became the majority shareholder, and moved its head office to Wellington.

Who printed the money?

Apart from a brief period in the 1850s, New Zealand had no central bank until 1934. Banks issued their own bank notes, so a variety of different kinds of notes were in circulation.

The government’s ownership of the BNZ, and use of it as its banker, allowed it to become the largest trading bank. It was fully nationalised in 1945.

An 1865 law which established the Post Office Savings Bank also curbed the rights of other savings banks and enabled it to absorb competitors. By the mid-1950s the Post Office Savings Bank controlled around 80% of the personal savings market.

Other financial institutions

From 1950 non-bank financial institutions – such as building societies, finance companies, merchant banks and solicitors’ nominee companies – grew strongly by offering services that banks could not, such as riskier lending at higher interest rates. In 1960 finance companies only accounted for 1% of total deposits of the bank and finance sector as a whole, but by the end of 1984 this had increased to 20%.

Regulation changes

The government began to ease the restrictions on financial institutions from 1957. In 1964 trustee savings banks were allowed to expand their operations throughout any one of the sixteen geographical zones that were set at that time. Trading banks were able to operate savings banks, allowing them to compete with the Post Office Savings Bank and the trustee savings banks in the personal banking market.

The financial services market grew rapidly in the early 1980s but the regulatory system did not keep pace. Following the election of a new government in 1984, and mirroring what was happening in many other countries, a process of deregulation began.


Banking and finance since 1984

Deregulation

The main effect of deregulation from 1984 was to remove the rules that restricted competition within the finance sector, particularly those that split the financial services market into different segments and set who could operate in each market segment. After 1987 there were only two categories of financial institution: registered banks and non-bank financial institutions. The main distinction between the two is that banks have to be registered with the Reserve Bank and are the only institutions which can use the word ‘bank’ in their name.

The fact that banks were no longer disadvantaged in competing against other classes of financial institution led to major changes. When the new law came into effect on 1 April 1987, the four existing trading banks – the Australia and New Zealand Banking Group (ANZ), the Bank of New Zealand (BNZ), the National Bank of New Zealand and Westpac – were the first four to register.

This number expanded rapidly. Another seven banks were registered in July 1987 – all were pre-existing businesses, generally in merchant banking, and most of them were branches or subsidiaries of international banks. These were followed by a further stream of new entrants, many of them existing non-bank financial institutions. Converting to bank status gave them greater freedom.

Banking status was granted to the Countrywide Banking Corporation (a former building society, which was a financial institution owned by its members), Postbank (the old Post Office Savings Bank), Auckland Savings Bank (later ASB Bank), Westland Bank, Taranaki Savings Bank (later TSB Bank) and Trust Bank New Zealand (all successors of trustee savings banks), the Rural Bank, and United Bank (another former building society).

Because of the law changes, savings banks disappeared as a separate class of financial institution, and most merchant banks also disappeared. The building-society sector shrank significantly – the major survivor, the Southland Building Society, obtained registration as a bank in 2008. The finance-company sector also shrank, with many of the former finance companies being absorbed into banks. In 2005 banks accounted for around 74% of the assets of banks and other financial institutions taken together.

Boom and bust

Deregulation both fostered and coincided with a financial boom and subsequent bust. The most public episodes, both triggered by the stock market crash of October 1987, involved the Development Finance Corporation and the Bank of New Zealand. The former collapsed after being sold by the government; the latter got into financial difficulties while the government was still a majority shareholder. It raised additional capital in mid-1989 but remained vulnerable; the government had to put $420 million into it before selling it to the National Australia Bank in November 1992.

Bank consolidation

In the early 1990s New Zealand had a large number of banks. It was difficult for some of them to maintain profitable businesses, particularly in the aftermath of the 1987 stock market crash and the property crash that followed on from that.

A process of consolidation followed. Postbank was acquired by ANZ, ASB absorbed Westland Bank, the Rural Bank was acquired by the National Bank and Countrywide acquired United Bank. In 1996 Westpac acquired Trust Bank New Zealand, and in 1998 the National Bank acquired Countrywide. ANZ bought the National Bank in 2003, to become ANZ National Bank. Partly in response to those mergers, but also in response to complaints about the service provided by foreign-owned banks, the government established Kiwibank in 2001 as a subsidiary of New Zealand Post.

A consequence of deregulation and the free entry of overseas banks into New Zealand was that by June 2009 less than 4.5% of the assets of the banking sector were held by New Zealand-owned registered banks. At that time seven of the 18 registered banks were Australian owned – including the four largest – accounting for 90% of the New Zealand banking sector by total assets.

Overseas banks were able to operate in New Zealand either as locally incorporated subsidiaries – which was generally preferred if they were accepting retail deposits from the general public – or as branches of their parent bank. In 2009 there were four banks that operated both a branch and a subsidiary in New Zealand.

Complaints

To deal with complaints about their conduct, and to ensure reasonable standards of fairness in their relationships with customers, banks established a Code of Banking Practice. This came into force in March 1992, and from July 1992 was supported by the banking ombudsman, who considers customer complaints. Complaints can only be considered by the banking ombudsman if they have first been though the bank’s own internal complaints process.


The business of banking

Banks provide two main services:

  • a structure through which people can make payments, particularly electronic payments
  • a means by which people can save and borrow money.

By the 1990s it was extremely difficult for anyone to function in New Zealand without a bank account for making and receiving payments

Growth of non-cash payment

Cheques

In 1993 (the first year for which statistics were published) cheques were the most popular method of non-cash payment in New Zealand, making up 54% of the 858 million non-cash payments. Since then their use has significantly declined, to 8% of 2,046 million non-cash payments in 2007.

ATMs

In the 1990s there was significant growth in the use of bank-issued and branded debit cards designed for electronic access to accounts. These were originally issued to allow bank customers to access ATMs (automatic teller machines), which were introduced in the early 1980s. ATM usage grew relatively slowly between 1993 and 2007, perhaps reflecting the charges that banks sometimes imposed for their use. In 2007 there were 205 million transactions (mainly withdrawals, but some deposits and transfers) from 2,400 ATMs. These were around 10% of all non-cash payments.

EFTPOS

EFTPOS (electronic funds transfer at point of sale) transactions have been available in New Zealand since the mid-1980s. The use of EFTPOS is now so prevalent that some people make almost no use of cash. In 2007 there were 998 million EFTPOS transactions through 131,000 terminals, up from 92 million transactions through 11,000 terminals in 1994.

Credit cards

There has also been growth in credit-card usage, encouraged by reward schemes and the absence of any transaction charges to cardholders. The costs of transactions are borne instead by retailers and other payment recipients. Credit-card transactions have grown from 39 million in 1993 (5% of transactions) to 241 million in 2007 (12% of transactions).

Other non-cash payments

In 2007 payment by direct debit and electronic credit accounted for 5% and 17% of transactions, respectively. There were also small numbers of transactions processed through specialist systems, such as Austraclear and SCP (same-day cleared payments) for million-dollar payments, and these account for the majority of the value of transactions that are processed through the New Zealand system.

Cheque out

Before 1995 a cheque was not deemed to be cleared until it was physically moved to the recipient’s bank branch. Since 1995 electronic transmission of cheque information has been acceptable.

Lending and borrowing

Banks hold the savings of people who have surplus income, and are also a source of funds for people who want to borrow. For example, these needs and preferences may depend on life-cycle factors, such as the need to borrow money to buy a house and the need to save for retirement

Home mortgages are a major part of banks’ lending activities, and are one of the most competitive areas of business amongst banks. Banks also lend to individuals, through overdrafts, term loans, credit card accounts and revolving credit facilities; and to businesses, for example a manufacturer who wants to build a new factory.

The net interest income from money lent accounts for around 70% of bank’s income, and fees for around 30%.

Virtual banking

In 1997 ASB launched BankDirect, the first bank to service customers solely through ATMs, online or by phone.

Intermediation

Banks have a role as financial intermediaries because they specialise in assessing the creditworthiness of borrowers, who will not be known to depositors. The depositor entrusts their money to the bank with the expectation that the bank will ensure that the value of loans backing the deposit, and therefore the bank’s ability to repay, is maintained.

Non-bank financial institutions also perform an intermediation role. Some are primarily savings institutions – for instance credit unions, which follow conservative lending strategies. Others invest more speculatively, and so offer their investors a higher rate of interest than they would likely get from a bank, but at greater risk that their borrowers will not be able to service the loans. Finance companies have tended to lend particularly in development activity, which banks have preferred not to be involved in.


Risk in banking and finance

Balance of risk

Banks and other financial institutions are an important source of liquidity (spending power) for an economy, since deposits held for transaction purposes must be available for transfer on demand. A substantial proportion of bank deposits are held in on-demand or readily accessible accounts. On the other hand, borrowers generally need longer-term funding. Banks reconcile these competing needs by assuming that not all customers holding demand deposits will withdraw or spend them at the same time.

However, this balance can be upset if customers lose confidence in the bank or financial institution. In this event, little will be deposited with it and substantial amounts will be withdrawn, possibly leading to the ultimate failure of the bank.

In the early 2000s banks experienced strong profitability and low loan default. Much of that profitability was sustained by household debt, while a high proportion of the funds available for lending were from overseas investors. Of the $373 billion of total bank assets as at 31 March 2009, households supplied 23.7% of funds and accounted for 45.2% of total bank lending – mostly housing-related. Reflecting New Zealand’s poor savings record and the difficulty banks have had in attracting retail deposits, 31.1% of total funding comes from offshore.

Finance companies and other non-bank lenders

Other parts of the financial system lack depth and liquidity compared to banks. The second biggest lenders to firms, after banks, are the existing owners of those firms plus other informal sources such as family and friends. Equity, venture capital and debt markets are comparatively underdeveloped in New Zealand compared with other OECD countries. In Australia in 2007 the banking sector accounted for about 50% of the assets of the financial system compared with 74% in New Zealand.

The vulnerability of the non-bank financial sector was highlighted from mid-2006 to mid-2008, when 24 finance companies failed to varying degrees. An assessment in June 2008 suggested that of more than $2.3 billion of investor funds in these companies, nearly $600 million (around 25%) had vanished.

On the investor side, the most vulnerable companies were those that had relied on small-scale individual investors – who were more likely to panic – or those that did not have the backing of a major bank. Institutions that had such backing, or were primarily vehicles for savings rather than speculation (such as building societies and credit unions), were less vulnerable.

Bridge to nowhere 

One of the finance-company collapses involving a large number of small investors was Bridgecorp, which specialised in property. It defaulted on repayments of some term investments in July 2007. It owed around $500 million to 18,000 investors; receivers estimated investors would get a payout of between 18c and 51c for every dollar they were owed. 

Reserve Bank interventions

In response to these developments, and also to the world-wide liquidity crisis and economic downturn that gathered pace from September 2008, in the second half of 2008 Treasury and the Reserve Bank announced a retail deposit guarantee scheme to assure the customers of banks and eligible finance companies that their deposits were secure. They also announced a wholesale guarantee scheme to make it easier for financial institutions to raise money overseas.

The health of the banking system was assisted by the fact that the none of the principal banks trading in New Zealand – all Australian – had engaged in some of the riskier financial dealings that had got many northern-hemisphere banks into difficulties in 2008.

The wholesale deposit guarantee scheme expired on 30 April 2010, with no claims having been made under it by that date.

The retail deposit guarantee scheme lasted until 12 October 2010 and covered total deposits of approximately $133 billion with 73 financial institutions. By July 2010 just under $80 million had been paid out. Payments in respect of South Canterbury Finance, which went into receivership at the end of August 2010, were by far the most substantial; the crown paid out all 35,000 depositors (but no shareholders) in full at a cost of $1.6 billion, and also paid out other creditors at a cost of $175 million (to simplify the receiver’s task).

An extended guarantee scheme for retail deposits in approved companies was to operate from 12 October 2010 to 31 December 2011; it covered seven institutions at its commencement date.
 


Bank profits

Bank revenue

Customers deposit funds (savings) with banks, and banks generally pay interest on savings. Banks then lend that money to people who want to borrow. They charge the borrowers a higher interest rate, generating some net interest income. Banks also gain income from fees and from providing other services.

Out of their gross income they pay their operating expenses such as staff, premises and the technology that powers the payments system, write off any losses on loans (from borrowers who have been unable to repay them), and pay tax. At the end of this process they are left with a net profit after tax, which in a favourable economic environment should be at a little over 1% of the assets.

Competition

Competition in the banking industry, which followed deregulation in the 1980s, led to banks adopting user-pays pricing for their services. Fees for specific services more accurately reflected the actual cost of providing those services than previously, when cross-subsidisation (where a customer using services sparingly effectively subsidised a customer with high usage levels) was more common. However, the increased level of fee income was offset by a smaller margin between the average interest rate banks pay for deposits and the average rate they charge borrowers.

Increased competition impacted not only banks’ income, but also their costs. As well as improving their product range and quality of service to the customer, banks have reviewed the cost-effectiveness of every part of their operation. For some banks this has resulted in significant redesign and restructuring of both their corporate and retail operations to improve their competitiveness. Many banks closed branches, particularly during the 1990s, to reduce their cost levels.

No business like bank business

With a net profit after tax of over $1 billion in the year to 30 September 2008, ANZ National Bank group, which includes the ANZ Bank, the National Bank and UDC Finance, is one of New Zealand’s largest companies (based on profits and assets). However, in the nine months to 30 June 2009, in a time of economic recession, profit fell by 43% compared with the same period in 2007–8.

Bank capital

Banks need to make profits to sustain their business – without profits, banks will not have the necessary capital to lend, and they would not be able to support the payments infrastructure on which the economy depends. As households, farmers and businesses steadily increased their borrowings through time, banks have needed increased quantities of capital. The main channel by which they obtain this is through earning profits. Some of these profits are reinvested in the banks, while the rest are paid to shareholders as dividends, so shareholders can be persuaded to invest more capital in the banks when it is needed.

Capital is also needed to absorb losses in times of economic downturns such as in 2009. Profits that banks built up over the previous 15 years gave them sufficient buffers of capital to survive.


International banking connections

New Zealand’s banking system is connected to the international system through:

  • the foreign ownership of most of the country’s banks
  • the importance of international trade and its financing to the New Zealand economy
  • the dependence of local banks on getting funds from overseas to sustain their lending.

Foreign ownership of New Zealand banks steadily increased from the 1980s because, with deregulation, many of the locally-owned institutions sought overseas owners to be more competitive. Access to technology and knowledge was a factor in this, but more important was the additional capital strength that banks gained through such investment.

International trade links

International trade has been assisted by the extent of banks’ international networks, which are much more readily accessible for banks that are already operating in multiple countries. The growth of Australian ownership of the New Zealand banking sector in particular has reflected the close economic linkages between the two countries. This was a specific reason for the entry of the National Australia Bank and the Commonwealth Bank of Australia (when it acquired a majority shareholding in ASB in 1989) into the New Zealand market during the 1980s.

Kiwi banking

Both TSB and Kiwibank trade on the fact that they are New Zealand owned. TSB highlights the fact that ‘in 1996, we became the only 100% New Zealand-owned bank’ while Kiwibank, which was set up by the government in 2002, describes itself as ‘a little Kiwi-owned bank taking on the Aussie banks’. 1

Overseas funds

The funding that overseas residents provided to New Zealand banks was one of the most important linkages between the New Zealand banking system and international markets. Deposits from New Zealanders have not been enough to fund the growth in the banks’ lending, and further funding from international investors has been necessary. Some of this has come through the foreign-owned parents of New Zealand banks, and it is probable that this funding would have been much more difficult to obtain if the banks borrowing these funds had not been foreign-owned.

Moreover, the banks have been able to borrow money in New Zealand currency or, if it has been in foreign currency, it has been able to be converted to New Zealand dollars at someone else’s risk. This has meant that banks have not been exposed to the risk that the value of the New Zealand dollar might decline, exposing them to foreign exchange losses.

Footnotes

Working in banks

Bank staff before the 1980s

Before the 1980s the structure of bank employment was very rigid. For instance, although banks had started to employ women in response to the labour shortages that occurred during the world wars, women’s employment was quite limited in its scope.

Rigidity in work reflected the rigidity of bank branch organisation. Branch staff was made up of:

  • tellers, who accepted transactions by customers at counters, including the receipt and payment of cash
  • the ledger department, where people could open and close accounts, get account balance and other information, and deal with term deposits; and, until bank computerisation in the 1960s, it also handled accounting functions
  • the MICR (magnetic ink character recognition) processing area (from the 1960s), where cheques and other forms were encoded so they could be processed by computers
  • the international department, which dealt with payments for trade transactions, and with customers who were travelling internationally, or who had small international payments to make or receive
  • the securities department, which was the most prestigious department, which handled lending and related documentation
  • the manager, who was primarily responsible for lending
  • the accountant, who managed the day-to-day operations of the branch, including the staff.

Women’s work

The Bank of New Zealand first hired women during the First World War, and employed 326 female clerks by June 1918. When the war ended, many of these women lost their jobs – in 1939 the bank only employed 74 women.

Senior roles were dominated by male career staff – any male staff in more junior roles were likely to be there to learn how bank branches should operate. By contrast, female staff dominated the more junior roles. If they became dissatisfied with the lack of opportunity for advancement they would leave.

Bank head offices were relatively small, responsible for a limited range of central administration functions.

Staff changes from the 1980s

Deregulation in the 1980s led to a focus on competition and efficiency. Banks tried to reduce costs and increase revenue through reorganisation and staff changes. Roles within branches changed, and although there was still a requirement for some tellers to handle non-electronic transactions, branches came to be populated with personal bankers who could undertake a wider range of roles, including conducting lending interviews.

In the 2000s lending decisions were made using a computerised credit-scoring model, and most processing was centralised. Branches often did not have a manager. Managers that remained were more like sales coaches, responsible for making sure that the branch achieved lending growth targets, rather than being responsible for any intricate lending decisions.

More complex lending was handled by specialist commercial and rural bankers. They reported through their own specialist structure, rather than through branches.

The account inquiry and sales processes that used to be handled by branches were centralised into call centres. Staff ability to respond to more complex queries was assisted by extensive computer support. These call centres and other centralised processing units were part of a much larger head-office infrastructure.

In the 1970s, 90% of a bank’s staff might have been working in branches. In 2009 this proportion was less than 50%. Banks’ head offices had many specialist roles that did not exist previously, in areas such as product management and strategy. Many staff had university degrees, and not just those in the head offices. Previously training was more like an apprenticeship, with staff learning on the job.


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How to cite this page: David Tripe, 'Banking and finance', Te Ara - the Encyclopedia of New Zealand, http://www.TeAra.govt.nz/en/banking-and-finance/print (accessed 20 August 2018)

Story by David Tripe, published 11 Mar 2010