'Communities will suffer' as $28b Reserve Bank scheme advantages big banks

Friday, 4 December 2020

Building societies and credit unions aren't feeling the Reserve Bank's love.

Communities in Nelson and the Wairarapa will be among the first to suffer if building societies and credit unions remain shut out of the Reserve Bank’s $28 billion Funding for Lending scheme, a lawyer says.

Big banks will be able to start borrowing freshly printed money from the Reserve Bank at the Official Cash Rate of 0.25 per cent from Monday, helping them displace more expensive funds from bank depositors.

The move is the latest attempt by the central bank to lower retail interest rates and shield the economy from the impact of the Covid downturn.

But Reserve Bank deputy governor Geoff Bascand told non-bank lenders last month they generally didn’t qualify for the loans because they didn’t have the collateral it deemed eligible.

Last year’s ‘First Credit Union Christmas Parade’ in Hamilton was one of the many local events sponsored by non-bank lenders.

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The Reserve Bank will kick off its $28 billion Funding for Lending scheme on Monday amid warnings it will put Kiwi-owned building societies and credit unions at a commercial disadvantage to the big banks.

Buddle Findlay lawyer Simon Jensen, who has been coordinating the response of 18 building societies and credit unions, said their exclusion from the initiative was the latest in a series of snubs.

“The Reserve Bank has provided a plethora of support to the banks.

“Credit unions and building societies are saying ‘as a regulator you are providing more and more advantage to our competitors, what about us?’”

Buddle Findlay lawyer Simon Jensen says the situation is simply not fair.

Non-bank lenders had also to fight hard to get partially included in the Government’s Business Finance Guarantee Scheme, and had not benefitted from the regulatory breaks provided to banks that offered customers “mortgage holidays”, Jensen said.

The biggest organisations set to be disadvantaged by Funding for Lending include the Nelson and Wairarapa building societies, the First Credit Union and the Baywide credit union, he said.

Those building societies in particular were competing head-on with the banks and both were worried Funding for Lending would provide cheap funding for the banks to take customers off them, he said.

“It just doesn’t feel fair. The first people who will be impacted will be local communities.

Building societies are taking their case to politicians.

“The likes of Nelson Building Society put an awful lot of money back into their local regions. They sponsor community rugby and events throughout that region and provide school vans.”

Non-bank lenders could put up as good security as the major banks if they were given enough time to organise that and told what they needed to do, he said.

Wairarapa Building Society chief executive Paul Bywater said the sector had put forward solutions, but it felt like the Reserve Bank had lumped it in with the likes of “loans sharks and dodgy finance companies”.

“We appreciate as a sector we don’t have the market breadth of the big retail banks.

“We understand not every single initiative is going to be available for us.”

Reserve Bank deputy governor Geoff Bascand says ‘non-banks’ should benefit from a flow-on effect as banks lower their interest rates to savers.

But the exclusion from Funding for Lending was “the biggest poke in the eye” for the sector so far and flew in face of developing a solid alternative to Australian-owned banks, he said.

“As our sector is essentially 100 per cent funded by retail deposits, it really does tilt the playing field to such a degree that it could potentially put some of the sector out of business.

“It is not competition when you have one arm tied behind your back and a blindfold put on you by the regulator.”

National Party list MP Nick Smith, who represented the Nelson electorate until the October election, said he had been watching the situation, which was “unfair and discriminatory”.

The Nelson Building Society was a substantial institution with assets of more than $1b, he said.

“We are effectively going to have the big Aussie banks eating the Nelson Building Society’s lunch using cheap money provided by the Reserve Bank.

“It needs to be reconsidered.”

Jensen said local ownership of the banking sector had fallen from about 40 per cent in the mid-1980s to less than 10 per cent.

“Unless somebody does something about it we are going to be forced to use Australian and increasingly Chinese banks to transmit monetary policy for New Zealand.”

Approaches were now being made to MPs to persuade them to step in, Jensen said.

“If the regulator is struggling, there is an option for the Government to issue a policy statement.

“It is something ultimately for the politicians to decide.”

Bywater said the building society was reaching out to its local MPs.

“All we can do is keep pushing our case.”

Bascand acknowledged the “perceived inequities” in his letter but forecast non-bank lenders would benefit from a trickle-on effect as a drop in bank term deposit rates from Funding for Lending allowed them to reduce their own interest rates to savers.

He also made clear that any disadvantage building societies and credit unions experienced would not be intentional.

The bank’s actions had been solely focused on promoting a sound and efficient financial system “and have not in any way been intended to favour one sector of the financial sector over another”, he said.

“While we will continue to work with the non-bank sector to ensure a level playing field in the financial sector exists, please appreciate that this must be done within our own mandate, risk appetite, and principles,” he said.