How about a guarantee for customers as well as banks?

by frog

The Government is selling its move to guarantees bank deposits a a bold response to the current financial crisis.  In reality it had little choice because all other countries, and in particular Australia, were already doing the same thing.  It’s a necessary response to other countries actions following the financial crisis.

Because all New Zealand banks are owned by Australian banks there was a risk that if Australian bank customers’ deposits were guaranteed and New Zealand ones were not that Australian banks could change their behaviour to favour Australian customers in preference to New Zealand customers.

However the opposing argument to that is government guaranteed deposit insurance encourages banks to act more aggressively knowing that the government is compelled to bail them out.  Interestingly New Zealand and Australia which are two of very few countries without government guaranteed bank insurance are also two of the countries that have best resisted the banking turmoil currently hurting the world’s finances.

So if we are going prop up foreign banks then it seems fair that we also require them to lend more responsibly, to future proof ourselves from further financial strife.

A couple of months ago I noted that bank workers’ union Finsec had already done some good work in this area, developing a report [pdf] and a series of recommendations around responsible leading, including; establishing an independent Financial Consumer Agency to oversee the workings of the financial sector, establishing a New Zealand Code of Lending Practice and a Code of Social Responsibility for the finance industry, and strengthening the role of the Reserve Bank to license and supervise financial institutions’ lending practices.

Those measure would require lenders to take all reasonable steps to act in the best interests of a borrower, ensure they have the access to independent advice and have the current capability to service the proposed debt.

Two months later and that all seems rather prescient.

Banks have an important role to play supporting our financial stability but currently many have a business plan that promotes more and heavier lending, and encourages customers to take on credit cards and debts that they may not need. We haven’t benefited from their unlimited lend-and-grow business model, so it’s important that we don’t now suffer either.