The Banking System

The banking system in New Zealand is a relatively simple one structurally and comprises a central bank–the Reserve Bank of New Zealand–five commercial or trading banks (each with its own private savings bank), trustee savings banks, and the New Zealand Post Office Savings Bank. A number of other institutions in New Zealand notably the stock and station agency companies also undertake some functions usually regarded as distinctive to banking business. But as such transactions as the acceptance of deposits and the operation of current accounts that may be drawn on by cheque or order are normally a relatively small proportion of their total business, and as their total deposits are small compared with those of the trading banks, they are not required to comply with legislation relating to banks. This position, however, may change in the future.

In the banking system the central bank is the youngest member apart from some of the trustee savings banks and the private savings banks which opened in October 1964. This position is by no means peculiar to New Zealand and reflects the tremendous changes in banking and in attitudes towards monetary or credit policies since the early nineteen thirties. The Reserve Bank of New Zealand commenced business in 1934, almost 100 years after the first trading bank began business in this country. The Union Bank of Australia later merged in 1951 with the Bank of Australasia into the Australia and New Zealand Bank Ltd., opened in New Zealand in 1840. Of the other four trading banks two, the Bank of New South Wales and the Bank of New Zealand, commenced business in 1861 and have thus recently celebrated their centenaries. The National Bank of New Zealand Ltd. began business in 1873, while the latest and most recent was the Commercial Bank of Australia which commenced business in this country in 1912.

The trustee savings banks have an equally long history, the first such being established in Auckland in 1847. By 1870 nine trustee banks were in existence but four, Lyttelton, Wellington, Napier, and Nelson, did not survive the turn of the century. The five remaining ones–Auckland (1847), New Plymouth (1850), Dunedin (1864), Invercargill (1864), and Hokitika (1866)–have prospered.

The Trustee Savings Banks Amendment Act of 1957 gave authority to the Minister of Finance to approve in certain circumstances the opening of new savings banks, and in June 1959 the Waikato Savings Bank began business in Hamilton. Since then several other banks have been established.

The Post Office Savings Bank, by far the biggest savings bank, was established in 1867, and has since grown into a major financial institution .

Early Difficulties

Banking in New Zealand has not been without its crises and spectacular developments. Tales both tragic and amusing are told about its early days when a main consideration was the purchase of newly mined gold, and when efforts were made to found banks which could not secure a firm footing and which, in consequence, were short lived. The Colonial Bank of New Zealand, for example, was established in 1874 with its head office in Dunedin. Authorised capital was £2 million, of which £400,000 was paid up on the 200,000 shares issued from the total of 400,000. Up to 1895 the Colonial Bank paid an average dividend of 7 per cent, but in that year it became clear that, largely as a result of reduced earnings, a fall in the value of its securities, and a large increase in bad debts, a crisis was imminent. Earlier proposals for an amalgamation with the Bank of New Zealand were renewed, and in November 1895 the Colonial Bank, having been purchased by the Bank of New Zealand closed its doors–not a very happy way of celebrating 21 years of banking. Shareholders received 11s. 1¾d. for each 2 share .

The Bank of New Zealand had also been in difficulties in the nineties, and June 1894 saw urgent legislation introduced and passed in one night. The plain purpose of the legislation in the words of the bank's historian “was to save the bank”. In 1945 this bank was nationalised when the Government, which previously held preference and certain long-term mortgage shares, acquired all the bank's shares.

The Reserve Bank

Various factors account for the importance of banks in the economy but the major one is undoubtedly their unique capacity to create credit, though within certain defined limits. In fact, it is this capacity which principally distinguishes a bank from other financial institutions. Variations in the cost and availability of trading bank credit play a significant role in affecting domestic economic conditions.

The establishment of the Reserve Bank of New Zealand, which opened for business in August 1934, among other things reflected widespread concern over the control of money and credit in New Zealand. There had also been criticism over the fixing of the New Zealand exchange rate which, until then, had been left to the trading banks. When first established, the Reserve Bank was privately owned but an amendment in 1936 to the original 1933 Act abolished private shareholdings in the Bank which became, and has since remained, State owned. Over the years there have been changes both in the statutory functions of the Bank and in its methods of giving effect to them. At the present time the Reserve Bank's primary functions, as defined in section 8 of the Reserve Bank of New Zealand Act 1964, are:

1. The primary functions of the Bank shall be:

   1. To act as the central bank for New Zealand; and

   2. To advise the Government on matters relating to monetary policy, banking, and overseas exchange; and

   3. Within the limits of its powers, to give effect to the monetary policy of the Government as communicated in writing to the Bank under subsection (2) of this section, and to any resolution of Parliament in relation to that monetary policy.

2. For the purposes of this Act, the Minister may from time to time communicate to the Bank the monetary policy of the Government, which shall be directed to the maintenance and promotion of economic and social welfare in New Zealand having regard to the desirability of promoting the highest degree of production, trade, and employment and of maintaining a stable internal price level.

3. The Bank may, on behalf of the Government, regulate and control:

   1. Money, banking, banking transactions, credit, and currency:

   2. Rates of interest in respect of such classes of transactions as may from time to time be prescribed:

   3. Overseas exchange and overseas exchange transactions.

Under the same Act, the Bank is required “to endeavour, within the limits of its powers, to maintain, in addition to any holdings of gold, an adequate level of overseas reserves”, and to keep the Minister of Finance informed of the overseas exchange position and prospects, and of the level of overseas exchange reserves it regards as adequate.

The Bank is thus both adviser on and executant of monetary policy. It has of course several other functions which may be summarily tabulated as follows:

1. Managing the note and coin issues.

2. Managing the public debt and acting as Registrar of Government and Local Authorities Stock through its Chief Accountant.

3. Acting as banker to the Government and to various marketing organisations (but not to private firms or individuals) by receiving deposits, operating current accounts, extending credit, and handling overseas exchange transactions.

4. Undertaking economic research and analysis, particularly of the current and prospective economic situation and compiling and publishing statistics, particularly relating to banking and overseas exchange transactions.

The main techniques used by the Reserve Bank to influence the amount of credit extended by the trading banks and hence the level of expenditures comprise:

1. Changes in the reserve ratios, which determine the amount each trading bank must maintain in its account at the Reserve Bank.

2. Changes in its discount rate which is also the rate the trading banks pay when they are required to borrow from the Reserve Bank to maintain their statutory minimum balances.

3. Selective control over trading bank advances.

The extent to which a bank can extend credit which, when used by its customers, will cause it to lose funds to other banks, is determined by the amount of cash it holds at the Reserve Bank and its ability to borrow at the Reserve Bank's discount rate; hence these techniques constitute a powerful armoury. Certainly they are blunt in comparison with techniques used in some other countries, and it is true that they have not prevented large expansions in bank credit at various times. While, however, they might be improved, they are likely to remain the main techniques in use.

In addition to such powers in respect of the five existing trading banks, authority was given in 1964 for the Governor-General, by Order in Council, on the recommendation of the Minister of Finance made after consultation with the Governor of the Bank, to declare any person or class or persons carrying on as their principal business the business of banking, to be trading banks for the purposes of the Act. This authority would apply to a new trading bank or to a branch of an overseas trading bank as well as to any other business which became, in effect, a trading bank.

To enable the Reserve Bank to obtain information on the activities of the “fringe-banking” institutions and exercise some degree of control over their activities, the Bank is authorised to request any person or class of persons who (as a substantial part of their New Zealand business, accept deposits or carry on any banking business, or grant credit or make loans for the financing of industry, trade or commerce) to supply information concerning such business. The Bank may also make recommendations to them concerning the policy to be followed in respect of such business. With the prior authority of the Minister, the Bank may by notice in the Gazette require such information to be supplied. It may not, however, request or require any such person to disclose the identity of any particular customer.

In considering central bank methods of control, account must also be taken not only of the particular economic environment in which they are operated but also of the fact that the cost and availability of bank credit is but one of several factors affecting the demand side. More important are such factors as business expectations, the availability of goods and services, fiscal policies, and the levels of wages and other incomes.

The directors of the Reserve Bank are the Governor and Deputy-Governor, the Secretary to the Treasury, and seven other directors. There are four departments (Chief Accountant's, Chief Cashier's, Economic, and Secretary's), two branches (Auckland and Christchurch), and a staff of about 450. The Bank's head office is in Wellington. Its main overseas business is conducted through the Bank of England, which is its agent, and with other central banks. In New Zealand the Bank of New Zealand acts as agent in certain matters.

The Trading Banks

In comparison with similar banks in other countries the trading banks in New Zealand are subjected to very firm control and their activities in some fields are severely circumscribed. For example, they are subject to controls or, if not controls, to the terms of informal agreements either with the Reserve Bank or with the Government over:

1. The average rate of interest to be charged on all overdrafts.

2. The amount of overseas funds they may collectively hold at any time.

3. The rates of exchange charged for various transactions.

4. Their investments in Government securities.

5. Their participation in ancillary activities such as hire-purchase finance or savings banking.

Reasons for these restrictions on the trading banks' activities are to be found in the sources set out later. Here it is sufficient to note two points. First, despite the limitations on their activities, the trading banks in New Zealand have expanded steadily, as measured by the number of branches and the value of their advances to customers, although in relation to other financial institutions the expansion over recent years has been modest. Secondly, they provide a considerable range of services to their customers.

Of the five banks operating in New Zealand, the largest is the State-owned Bank of New Zealand which handles approximately 40 per cent of the total business. It is also the only New Zealand bank. The National Bank, whose business is almost entirely in New Zealand, is controlled by a London Board of Directors. The three others are essentially Australian banks.

In New Zealand bank profits are earned from four main sources–interest on advances, margins between buying and selling rates of exchange, charges for inland exchange and other services, and interest on investments. That these are relatively modest is evident from the annual accounts of the Bank of New Zealand. In its financial year 1963–64, this bank's disclosed profit of £748,375 was equivalent to just under 6.5 per cent on total shareholders' funds.

The main business of the trading banks comprises the following:

1. The acceptance of deposits either for a fixed term, in which case interest is paid, or on an “on demand” basis; i.e., current accounts on which no interest is paid unless the account is operated by a non-trading organisation.

2. The granting of loan accommodation to customers by overdraft or by discounting bills of exchange.

3. The provision of the current account and cheque system at a modest cost to customers.

4. The provision of facilities to handle transactions in overseas currencies, that is, remittances overseas in payment of imports or services and the receipt of overseas funds from exports, for example.

5. Assisting overseas travellers not only in their financial requirements–travellers' cheques and letters of credit–but also by arranging bookings.

6. The preparation of trade reports and confidential reports on the financial strength of local and overseas businesses.

7. The provision of facilities for the shipment of produce, particularly wool, to overseas markets on the producer's own account.

8. The provision of safe-custody facilities for documents and other valuables and of other ancillary services such as acting as attorneys for investment holdings.

9. The provision of savings bank facilities. (Authorised in 1964)

A few statistics will illustrate the scope and importance of the trading banks' major activities.

At the end of June 1963, total deposits with the banks were £343.3 million, compared with £275.9 million 10 years earlier. Of the total of £343.3 million, 265.0 million, or 77 per cent, were non interest bearing (i.e., current accounts), and the balance £74.3 million, interest bearing (i.e., largely fixed deposits).

Trading Banks' Deposits, Advances, and Discounts

Trading bank advances and discounts at the end of June 1963 amounted to £196.2 million, of which only £6.9 million, or 3.5 per cent, were discounts. Advances undoubtedly play an important role in the New Zealand economy. In contrast to the position in some countries trading banks in New Zealand make some relatively long-term advances–a practice which stems from their willingness in the earlier development of New Zealand to lend for capital purposes because other alternative sources of finance were not then established. The overdraft system means that customers do not pay interest on the total limits granted but only on the amount actually used. In addition to interest, bank customers also pay an “overdraft service fee” which is an annual charge levied on the highest limit or advance recorded during the 12 months ending 31 October. The minimum fee is £1 for limits up to 100; it then rises in steps to a maximum of £50 for limits over 50,000. The fee was introduced towards the end of 1961 because of the steady rise in the banks' costs in administering overdrawn accounts. It is doubtful if the fee has had any effect on the demand for bank credit or is a factor in persuading customers to confine limits to an absolute minimum.

Trading Bank Credit

The pattern of the banks' advances is clear from the following table which classifies the total into broad groups at 10 July 1963.

Over recent years trading bank advances and discounts showed little growth until 1961, if measured by averaging monthly figures. In 1955, for example, the average was £180 million; in 1959 it was down to £166 million; but in 1960 it had increased to £176 million and to 197 million in 1962 and 1963. Unused credit limits averaged £143 million in 1963.

Large as the figures for advances and unused limits may seem they are easily dwarfed by the figures for debits to customers' accounts, which give an insight not only into the major role of cheques in the payments system but also into the physical work the banks must cope with in providing a cheque service. The monthly average of banks' debits in 1963 was £662.4 million, which gives a total for the year as a whole of £7,949 million. Changes in the amount of monthly debits are an important indicator of the state of the economy and show whether money in the form of bank balances is circulating more or less rapidly.

At the present time there is little sign that the trading banks will be in a position either to seek a sustained and substantial increase in their advance business or to diversify their activities very widely. On the other hand, it also appears that they will not be confronted with the problem of competing with a postal settlement system (GIRO), which at one time appeared a likely prospect.

Savings Banks

Savings banks in New Zealand comprise the trustee savings banks, the Post Office Savings Bank, and the trading banks' savings banks. No statistics for these last are yet available, but as the following figures show, the Post Office Savings Bank is much larger than the combined trustee savings banks as the following figures illustrate:

The Post Office Savings Bank commenced business in February 1867 and, as the figure for the number of depositors' accounts clearly shows, is a major institution in New Zealand and one with which virtually everybody is familiar. There are over 1,000 branches of the Bank throughout New Zealand, and a range of services is available to depositors. To meet the varying requirements of the community the Bank provides various types of account–Ordinary Post Office Savings Bank; Thrift Club; Home Lay-by; Investment; National Savings; and School Savings Bank. Although conditions governing deposits to these accounts vary, essentially they are accounts for the small saver. For most of these, any amount in excess of 1s. may be deposited and withdrawals made on demand. Interest is paid annually by crediting accounts.

Besides providing a ready facility for people to save by operating a savings account, the Bank is of prime importance to the Government as a source of funds and, to the economy generally, as the channel for a large proportion of private savings. The Bank's funds are invested in Government securities. To the extent that the community saves instead of spending, the Government is able to finance its capital programme without resort to methods that could have an inflationary impact if its expenditure were not to be reduced or financed to a greater extent from taxation. Accordingly, the Bank plays a major role by providing savings facilities which, in the view of many economists, are just as important, if not more so, in promoting thrift as those other factors such as the rate of interest and the level of private income.

The trustee savings banks also occupy a prominent place in this country's finances. They are, however, limited to a certain extent by legislative provisions. Because repayment of their deposits is guaranteed by the State, some of these limitations are readily explainable. Others are not, however, and the explanation seems to lie in a conviction that the trustee banks compete with the Post Office Savings Bank and do not, by their existence, necessarily mean a higher net level of personal savings. The Trustee Savings Bank Act of 1948 laid down that a bank must not establish a branch or agency more than 25 miles from its head office. When, however, the trading banks were given authority in 1964 to open savings branches, this 25-mile limit was removed and replaced by a system of zoning based on 16 defined natural regions with a community of interest, each zone covering the area in which a particular savings bank was permitted to open branches. Another limitation on their activities is the requirement that not less than 50 per cent of their investments must be held in the form of Government securities. The banks are required to keep as cash in hand or on current account at least 5 per cent of their depositors' balances. Funds not held in these ways are invested by the banks in mortgages. The maximum rates of interest they may pay to depositors is fixed by Government; consequently, to attract customers, they are forced to rely substantially on the provision of a first-class service. Judging by the steady increase in the number of depositors over the last decade, the banks are playing a significant role in meeting local needs. By far the biggest trustee bank is in Auckland, partly of course due to the large population it serves. The next biggest is in Invercargill.

The Private Savings Bank Act of 1964 gave legislative authority for the trading banks to establish and carry on private savings banks by means of savings banks companies under the control of the trading banks. Activities of these savings banks are restricted under the provisions of the Act or of regulations: the upper limit on deposits on which interest may be paid is £2,000 (the same as for the trustee savings banks); interest rates paid are prescribed by Order in Council; they may not open branches in certain areas until existing specified trustee savings banks have been in operation for three years; the investment of funds is controlled; capital expenditure is regulated; and the hours of business and holidays are prescribed. It has been announced that Government stock in which these savings banks are required to invest will bear the same rate of interest as those issued to the Post Office Savings Bank–this is a lower rate than that of the trustee savings banks. These new savings banks will, with the Post Office Savings Bank and trustee savings banks, provide a comprehensive network of savings facilities which should result in a worthwhile addition to the volume of savings available to assist higher rates of economic growth.

by Robert John Familton, M.COM., Economist, Reserve Bank, Wellington.

• Report of the Royal Commission on Monetary, Banking and Credit Systems, 1956 (A to J. 1956, B. 3)
• Monthly Bulletins, Reserve Bank of New Zealand
• Banking in the British Commonwealth, (ed.) Sayers, R. S. (1952)
• Open Account, Sinclair
• K., and Mandle, W. F. (1961);New Zealand
• Banker's Hundred, Chappell, N. M. (1961)
• Australia and New Zealand Bank, Butlin, S. J. (1961)
• Banking Law and Practice in New Zealand, Bright, T. N. (1962)
• Money and Banking in New Zealand, Reserve Bank of New Zealand (1963).