Keith Rankin, 3 February 1999
Yesterday Jim Anderton, Leader and Finance spokesperson of the Alliance, announced that an Alliance government would, in effect, recreate the Post Office Savings Bank (POSB) which died in the late 1980s. (See NZ Herald reports Alliance pinpoints banking concern, and Alliance fires first populist election shot.)
The idea is a good one, that reflects a long (lost) New Zealand tradition by which the government would regulate a market by entering it. All of the publicly-owned companies that started out that way were corporatised in the 1980s. Most were then privatised or simply absorbed into the operations of their purchaser. One, the Development Finance Corporation (DFC) was sold to another, the National Provident Fund, and then allowed to fail.
The problem, accentuated in a small country, is that the private firms in a number of critical industries constitute an oligopoly if not a cartel. As such, they pursue monopolistic pricing practices. By introducing a government-owned bank, insurance company or whatever into that market, the government-owned enterprise could set its prices at the levels that would be set if the industry was subject to full competition. As a result, the private banks lower their charges in order to compete.
Monopolistic practice is not the only form of market failure, however. In banking, there are a number of others.
Our monetary system is, more than ever, based on electronic access to bank deposits. Having a bank account is now virtually a prerequisite of citizenship. Yet the commercial banks do not want customers who have low bank balances, make many transactions in proportion to their balance, or have no credit record or a poor credit history. (See Anne Else's Keep Out - You're Not Worth Serving.)
We need a bank that will open at least an electronic call account to any resident of New Zealand; a simple safe place where people can hold and access their money, and gain some return for doing so. I will call this account, the "social account". While, there would be no fees charged to holders of these bank accounts, there might be a minimum electronic withdrawal amount of say $20. (There is a social problem today of people using EFTPOS for very small transactions, to the inconvenience of queuing customers. The commercial banks seek to deter this through fees. The new POSB, not charging fees on social accounts, would need to address this problem in another way.)
The kind of account that I envisage need not have a chequebook. All it needs is a cash card - the best kind would be a VISA or MasterCard debit card and a positive real rate of interest. (A debit card is like Westpac Trust's "Encore VISA"; not a credit card but a cash card that can be used to purchase goods in New Zealand or overseas so long as the account is in credit.) The interest on such an account should be indexed at a little above the inflation rate, with a minimum nominal rate of 2%. (The interest rate net of withholding tax should be at least 0.5% above the inflation rate.)
All bank accounts today are "commercial accounts". While the new POSB would offer similar accounts on a competitive commercial basis (meaning at competitive rather than oligopoly prices), it would be obligated to offer anyone a social account, priced according to social criteria.
The new POSB would receive a subsidy to run its social accounts. In return it would be subject to a full social audit, which would include an audit of its pricing of commercial accounts, as well as to a financial audit.
Other social services would exist on the lending side of its ledger. The old POSB was required by law to invest in Government stock, the former Housing Corporation, and the former Rural Bank. The Housing Corporation and the Rural Bank were specialist publicly-owned banks which lent according to social criteria while also being expected to be efficient in their internal use of resources.
Today, the trading banks compete to lend cheap mortgage finance. Thus there is no need to create a mortgage lending arm to the new POSB. Rather, as the Alliance notes, it is small businesses in provincial New Zealand that are deprived of finance at reasonable interest rates. The lending agency of the new POSB needs to have a regional focus, and a small business focus. In addition, and given that most of the money deposited in the new POSB will not be from the more deprived regions, there should be an ability to supply venture capital with a focus at the national level. One partner - a new kind of DFC - would supply higher risk credit with high expected social rates of return.
The new POSB would also issue credit cards, which would charge lower rates of interest than the banks charge today; ie at competitive rather than oligopoly levels.
The new bank would not be New Zealand Post. Rather, NZ Post branches should become agents of the new bank. Indeed, in small towns without full postshops, the NZ Post agent would also become the agent of the new POSB. NZ Post or some other sub-contractor would undertake the transaction processing work. The lending partners of the new POSB would have no connection at all to NZ Post.
In summary, the new POSB would be required to perform social services while also accepting deposits on a commercial basis. The three key social services are:
The new POSB would be very different from an SOE (state owned enterprise) which is indistinguishable from a private company, except that it is government-owned. The Bank of New Zealand was an SOE before it was sold, in two stages, to the National Australia Bank.
The new POSB would be a government trading enterprise, which means that it has both social and commercial objectives, and is accountable primarily for the fulfilment of its social objectives.
The shareholders of the new POSB would benefit, not by receiving dividends from the profits of the new POSB, but by the increased tax revenue that would arise. The fulfilment of its social objectives (and those of its lending partners) would lead to higher levels of sustainable GDP than would otherwise pertain.
© 1999 Keith Rankin