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New Zealand banks with roots as special statutes institutions

3.4 The New Zealand banking system

3.4.3 New Zealand banks with roots as special statutes institutions

shareholders, the government and Fay Richwhite & Co44, to bail out the BNZ twice. In total, they had to inject over NZD 1.1 billion into the bank in 1990 and 199145. As part of the restructuring, the troubled portion of BNZ’ loan portfolio was transferred to a special entity (ADBRO

Investments Ltd) to speed up the recovery of the main banking operations. Finally in 1993, BNZ was sold to National Australia Bank (NAB), one of the major Australian banking groups, which has operated BNZ as a stand-alone subsidiary ever since.

To a certain extent, BNZ’s changes in ownership are also reflected in its financial disclosure. In the early 1980s, at the beginning of the observation period, BNZ reported like a public sector entity, emphasizing its role for the good of the New Zealand economy. Disclosure became more in line with privately owned banks, which are accountable to their shareholders, only when it was partially floated in 1987.

Prior to acquiring BNZ, NAB had already been actively building a presence in the New Zealand market. In 1987, it had registered as a bank which by 1992 had grown into a network of 35 branches with assets in excess of NZD 2 billion, i.e. 11% of BNZ’s asset at the time of its purchase by NAB.

statutes. All these institutions corporatized and sought bank registration in the late 1980s/early 1990s which meant a change of their ownership relationships and legal structure. As limited liability companies they now had easier access to external capital and, after the statutory protection of their original business activity had vanished, they competed head on with the established banks. Moreover, as limited liability companies, they could now be sold to or merge with other players in the industry.

This section firstly gives a brief overview on these statutes which is then followed by the profiles of the particular institutions.

3.4.3.1 Special statutes overview

The discussion in this subsection is based on Table 3-5 which lists the special statute legislation that has been in force during the observation period.

Building Societies have been and still are subject to the Building Societies Act 1965 which has, however, undergone some substantial revisions mainly with the Building Societies

Amendment Act 1987 which defined building societies more along the lines of other financial institutions. The amendment removed powers of the registrar, formerly the supervisor for this industry, and eliminated cross-support clauses among building societies. It also allowed the conversion of the institutions to a company registered under the regular companies legislation, i.e. issuing shares to its members. Later, the building societies also became subject to the provisions of the Financial Reporting Act 1993 which requires them to report with generally accepted accounting standards. Some building societies like SBS (Southland Building Society) have opted not to convert to a bank and still operate as a non-bank financial institution

incorporated as a building society.

The sector of regional trustee banks was subject to the Trustee Banks Act 1948, subsequently repealed by the Trustee Banks Act 1983. Under both acts, the government effectively guaranteed their deposits. The trustee bank legislation was repealed in 1988 by the Trustee Banks Restructuring Act which phased out government guarantees and set the

framework for corporatization. Community trusts were created to assume ownership of the newly formed banking entities.

The group of private savings banks had their own statute (Private Savings Banks Act 1964, repealed by Private Savings Banks Act 1983). This statute applied to savings bank set up as subsidiaries of the main trading banks which enabled them to offer savings products to their clients. This legislation was repealed with the Private Savings Banks (Transfer of Undertakings) Act 1992 which enabled trading banks to amalgamate their savings subsidiaries.

Post Office Savings Bank, Rural Bank and Bank of New Zealand were subject to their own statutes (see Table 3-5 and also the earlier discussion on BNZ for details). All three lost their privileges in 1987 when the system for uniform bank registration was put into place (with the enactment of The Reserve Bank of New Zealand (Amendment) Act 1986, subsequently replaced by The Reserve Bank of New Zealand Act 1989).

3.4.3.2 ASB (formerly Auckland Savings Bank)

ASB, established in 1847 as Auckland Savings Bank, had been a community savings bank in the Auckland area. Incorporated as a Trustee Savings bank with government deposit

guarantee, it expressed its intention to become a member of the group of Trustee banks

(subsequently called Trust Bank NZ) in 1986 but not much later opted to pursue its independent path. It had started extending its reach to other parts of the country when it corporatized and registered as a bank in 1989. Ownership was first transferred to the charitable ASB Bank Community Trust but in the same year Commonwealth Bank of Australia (CBA) acquired a controlling 75% stake in the institution. CBA finally bought out the community trust in late 2000 to become sole shareholder. To develop into one of the five leading banks in New Zealand, ASB has mostly relied on internal growth as opposed to taking over other banks; the 1990 acquisition of the small Nelson based Westland Bank, like ASB a former trustee savings bank, being the only notable exception. Given ASB’s history, meaningful disclosure of selected credit loss related information only became available in 1987.

3.4.3.3 Trust Bank Group

Trustbank was an institution that had directly been formed as a result of financial sector reform when eight regional trust banks joined forces in 1988 to form Trust Bank Group (Trustbank). While an increasing number of services were centralized into this new entity, Trustbank formally remained a cooperative arrangement with its members remaining

independently owned legal entities. New members joined later but others like small Taranaki Savings Bank (TSB) and more notably ASB left the group to follow their independent path. In April 1995 the member banks formally amalgamated into one unit but this was just one year before Trustbank was sold to and merged into Westpac (May 1996). In line with its policy to keep regional brand names,46 Westpac adopted ’WestpacTrust’ as its official bank name in New Zealand until it reverted back to the original Westpac brand in 2002.

3.4.3.4 TSB Bank (formerly Taranaki Savings Bank)

Taranaki based TSB booked its first deposit in 1850. With the loosening of regulations on banking by financial policy reform of the mid 1980, TSB decided to seek an independent path and to stand aside from the amalgamation of the country's Trustee banks mentioned above. Its ownership was transferred to a community trust and in 1989 it registered as a bank, changing its name to TSB Bank. It adapted its infrastructure to cope with lending activities of a retail bank because, like other trust banks, it had previously held much of its assets in government stock and other liquid investments with trading banks. Its growth has been smooth and steady, purely financed by internally generated funds. It has not ventured into activities unrelated to retail banking to any substantial degree with 90% of its gross loan portfolio classified as residential mortgages (data per 30 March 2005). Full service branches are predominantly located in the Taranaki core region but for the origination of home loans the bank has established service

46 Westpac initially also retained names of other banks acquired in Australia in the late 1990s like Challenge Bank and Bank of Melbourne.

centres in Auckland, Wellington and Christchurch. Accordingly, by 2005 more than two thirds of credit exposures are now outside Taranaki. To serve these customers and also to expand its depositor base, TSB started offering phone and later Internet banking services at a national level in 1996.

3.4.3.5 Countrywide Bank

Cooperative Countrywide Building Society became a registered bank in 1988 when it changed its name to Countrywide Bank (Countrywide). At the same time, the bank was publicly listed with members of the former building society allocated 40% of the shares while UK based Royal Bank of Scotland (40%) and General Accident Insurance Company (20%) became the dominant shareholders. Royal Bank of Scotland eventually bought out General Accident

Insurance Company and when Countrywide acquired United Bank, the UK bank took its stake to 100% in 1992. In 1998, finally, the bank was sold to and integrated into NBNZ.

3.4.3.6 United Bank

United Bank had its origin as a building society, too. It had been formed as United

Building Society by the union of Northern United Building Society and the Canterbury Building Society in October 1982. It became the target of a run on its deposits in August 1988

(MacPherson, 1993, 18.2.2). In 1990, it became a wholly owned subsidiary of State Bank of South Australia (SBSA) when it converted to a bank and SBSA subscribed to NZD 150 million for 100% of its capital. SBSA’s own problems soon became apparent and, only two years later in 1992, Royal Bank of Scotland merged United Bank into Countrywide.

This disturbed history and its short existence as a registered bank had effects on the data retrieved from United Bank’s accounts. The only extended time series were the static stocks of bad debt provisions reported from 1987 onwards. No substantial bad debt appeared in United’s

published accounts even though they must have existed according to the losses at United Bank shown in MacPherson’s report into the failure of SBSA (MacPherson, chapter 3.1.2).47

3.4.3.7 Rural Bank of New Zealand

The Rural Bank of New Zealand had originally been established as part of the State Advances Corporation after WWII. Legislation in 1974 constituted it as a rural development bank for the purpose of ‘making loans and providing other assistance for farming purposes and for other purposes in relation to primary industries’ ("Rural Banking and Finance Corporation Act 1974"s 19). When the new Labour government of 1984 gave it the direction to become a stand-alone bank, it registered as a bank under the new regime. Given that its customer base was comparably narrow and much of its loan portfolio had been lent at subsidized rates, its short existence in a liberalized market does not surprise. In 1990 the government sold it to the Fletcher Challenge Group and just two years later it was integrated into NBNZ. This is one of the reasons why NBNZ (since 2003 part of ANZ Group) still has a strong position as a lender to the rural sector in New Zealand.

47 As noted in the report on the collapse of SBSA, SBSA had paid NZD 150 million for the

estimated NZD 40.2 million net book value of United Bank. In fact, this book value was later estimated at a negative NZD 17 million (MacPherson, 1993, volume 8, chapter 18.1). It would be too speculative to derive more realistic estimates of loan losses at United Bank with the rough data provided in MacPherson.