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Key developments and events in New Zealand financial sector during observation period

3.4 The New Zealand banking system

3.4.1 Key developments and events in New Zealand financial sector during observation period

interventions (Grimes, 1998, p. 294). Grimes notes that these interventions had not only

macroeconomic efficiency problems, but also microeconomic distortionary effects as a result of treating different sub-sectors in very different ways. As to institutions operating in the pre-1984 era, Grimes (1998) suggested a break-down into three groups: trading banks, savings banks, and other non-bank financial institutions.

The five, respectively after 1982 four, trading banks included government-owned market leader Bank of New Zealand (BNZ) together with the National Bank of NZ, ANZ and Westpac (Bank of New South Wales merged with Commercial Bank of Australia in 1982 to form Westpac).

The universe of savings banks included the so-called ‘Trustee Savings Banks’ (i.e.

community based banks), and the Post Office Savings Bank, all with a deposit guarantee by the New Zealand government (Grimes, 1998, p. 295). These institutions made mortgage, and to a minor extent also personal, loans. Typically as much as half their assets were invested in local and central government securities.39 One could argue that this balance sheet structure made it harder for them to adapt in the subsequent deregulation as they lacked expertise to originate assets in a risky market. Note that in order to attract low-cost deposits and make certain classes of loans, the trading banks had also established their own savings bank subsidiaries at the time.

As to non-bank financial institutions during this period, cooperative building societies and credit unions were those which offered the most ‘bank like’ services to their members.

It had not escaped regulators’ attention, however, that, while each of the above groups of financial institutions was subject to carefully delineated sets of legislation, a substantial blurring between their activities had been occurring both in New Zealand and overseas (Doughty, 1986, p. 115). Substantial changes were thus initiated following the change of government in July 1984 when all interest rate regulation, ratio requirements, credit ceilings, and numerous other

39 Banks were subject to a maze of ratio requirements, with savings banks generally required to hold more low-risk government stock and other liquid assets (Deane, 1986, p. 17).

interventions were abolished (Deane, 1986, p. 11). The Reserve Bank of New Zealand

(Amendment) Act 1986 legislated the structural reforms of the banking industry. It allowed the entry of new banks and specified that there would be only one type of ‘bank’ in New Zealand, the registered bank (Sun, Tong, & Tong, 2002).40 Under the act, any registered bank was now able to engage in retail banking, wholesale banking or full service banking. No longer were there artificial limits on the number of banks, nor was there discrimination between domestic and foreign-owned institutions. The act also established a formal framework for the prudential supervision of banks.41

With the deregulation, the number of banks increased significantly as new foreign banks entered and domestic savings institutions and building societies converted to banks. One could describe the mood immediately after the 1986 deregulation as a time of uncertainty for some but great optimism, even euphoria for others. It was the time when some like United Bank and particularly Bank of New Zealand diversified into new areas of business whose unfamiliar risks subsequently caused major lending losses at the beginning of 1990.

As in Australia, state-owned institutions were among those which coped the least well in the rough climate of deteriorating markets. Most notable were extreme credit losses at Bank of New Zealand which lost its equity twice within a period of merely two years (see section 3.4.2.3). Debt write-offs for BNZ in Figure 3-8 were so large that they had to been shown in a chart separate from other NZ banks. Likewise, Rural Bank of New Zealand faced large loan losses. Development Finance Corporation New Zealand (DFC), a merchant bank which the government had just partially privatized in 1987, was strongly exposed to the falls of listed and non-listed companies after the 1987 share market crash and left with large bad debts. It collapsed

40 Note that under previous regulation the formation of a trading bank had required a special act of parliament (Grimes, 1998, p. 294)

41 Details of prudential regulation in New Zealand, in particular the elements of the bank disclosure regime, are presented in section 3.5.1.2.

in 1989 and was placed under statutory management by the Reserve Bank. The failure of DFC had a negative impact on New Zealand’s international credit standing as many international lenders to DFC had been banking on an implicit guarantee by the government which still held 75% of DFC’s shares. Finally, outside the sector of state-owned institutions, problems surfaced at NZI Bank which was created out of a wholesale finance subsidiary of insurance group NZI Corporation in 1987. It experienced substantial losses arising from the October 1987 share market collapse and the 1988/89 fall in the property market which led to its closure in February 1992.

The period since the 1989/1990 crisis can be characterized by consolidation among banks, good financial performance with declining and then stabilizing levels of loan losses (as

illustrated in Figure 3-7 and Figure 3-8). Many New Zealand-owned institutions were sold to foreign owned institutions after 1990.

As of 2006, and after the 2003 merger of NBNZ into ANZ, there remain 4 large multi-purpose banks in the market. As shown in Figure 3-9, ANZ, ASB, BNZ and Westpac hold 65%

of total financial sector assets which corresponds to more than 80% of assets held by deposit taking institutions (RBNZ, 2005). Of the other 16 banks registered, there are four that could be characterized as retail banks. Locally owned TSB Bank (formerly Taranaki Savings Bank) is one savings bank that has operated over the full observation period and for which data has been collected. There are some recent entries into retail banking by government-owned Kiwibank and St. George Bank’s New Zealand subsidiary Superbank which, in the meantime, has exited the market again. As mentioned earlier in this chapter, both have been omitted from the database due to the brevity of their existence. The same applies to the very small Auckland based Kookmin bank, a branch of a leading Korean retail bank, which mainly serves the Korean expatriate community.

A special feature of the New Zealand financial system is the comparably less regulated sector of non-bank financial institutions (NBFIs). Quite large pre-1984 according to Grimes (1998, p. 295), it later lost some significance but has again been growing strongly since 1998

(Thorp, 2003, p. 18). It accounts for approximately 10% of total domestically sourced credit provision, provides half of consumer credit and over 15% of commercial property lending, with the share of development lending significantly higher (RBNZ, 2005, p. 22). As shown in Hess &

Feng (2007), some NBFIs like Southland Building Society (SBS) and the cooperative PSIS (formerly Public Service Investment Society) have expanded into full scale retail banking activities without registering as banks with RBNZ. NBFIs have not been reporting under the bank disclosure regime but under the less stringent provisions of the Securities Act 1978. In line with the sample selection criteria, they have not been considered in this data collection.

Figure 3-7 Write-offs as % of average loans through observation period (New Zealand banks excluding BNZ and Rural Bank for ease of presentation)

NZ ANZ, 1993, 1.2%

NZ ANZ, 1990, 1.5%

NZ NBNZ, 1990, 2.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1980 1985 1990 1995 2000

NZ ANZ NZ ASB

NZ Countrywide NZ NBNZ NZ Trust Bank NZ TSB Bank NZ Westpac

(on average loans, annualized)

Source: from original financial statements

Figure 3-8 Write-offs as % of average loans through observation period (BNZ, Rural Bank)

NZ BNZ, 1988, 2.2%

NZ BNZ, 1993, 6.6%

NZ Rural Bank, 1990, 1.6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

1980 1985 1990 1995 2000

NZ BNZ

NZ Rural Bank

(on average loans, annualized)

Source: from original financial statements

Figure 3-9 New Zealand break-down of financial system assets (2004)

ANZ, ASB, BNZ, Westpac

65.6%

Wholesale banks 8.7%

Small retail banks 1.3%

Other deposit taking institutions 5.6%

Funds under management

18.7%

Intermediation assets 81.3%

Total financial system assets

(NZD 316 bn)

Assets with deposit taking institutions

(NZD 260 bn)

Source: RBNZ Financial Stability Report May 2005 (RBNZ, 2005)