Thursday 2 December 2010

In praise of foreign banks

Matt Nolan writes in praise of foreign banks.
On the surface there appears to be a lot in common with the Irish, Greek, and NZ economies. All three have high net foreign liability positions, liabilities are highly concentrated through banks who are borrowing overseas, all three have experienced some form of housing boom and lift in consumption, and finally all three appeared to have a relatively strong fiscal position before the GFC before moving into fiscal deficits after the shock. And yet (so far) while the Irish and Greek economies and banking systems have collapsed, New Zealand’s has been fine.

There are two major differences that have helped reduce the implied risk on our debt, making New Zealand much less likely to experience a bank run:
  1. Our banking system is primarily foreign owned,
  2. We have a freely floating exchange rate – combined with having much of our debt denominated in NZ$ this is useful.
This is an important point to recognise. While many commentators are saying we should “peg” our dollar and set up more domestic ownership of banks GIVEN the risks associated with the GFC, I tend to reach the opposite conclusion – namely, the reason why we haven’t suffered as much as these countries as been largely the result of our free floating exchange rate and the fact that a larger economy has a large stake in our banking system.

We're far more robust to shocks to the domestic economy than we would be if our banks' asset base were heavily New Zealand oriented. The Aussie parents are hardly likely to let their NZ branches fall over in the case of a liquidity problem here. But the NZ branches are operationally separate, subject to local prudential regulation, and hold reserves in New Zealand; if the Australian property market collapses, it would be very tough for an Aussie parent bank to lean on the New Zealand branch for assistance.

Systemic shocks and correlated risks are bad things for banks. Why would a small country ever want to rely primarily on "Local banks for local people"? Yeah, there are lots of systemic risks against which we can't insure easily. But that's no reason to try to make things worse.

Perhaps America should encourage Canadian banks to set up branches in the States....


  1. The Big Six Canadian banks all have US operations, though only about half of them have a substantial retail presence, e.g. Royal Bank of Canada => RBC Bank; Toronto-Dominion Bank => TD Ameritrade; Bank of Montreal => Harris Bank.

  2. you said:
    "it would be very tough for an Aussie parent bank to lean on the New Zealand branch for assistance"

    Are you sure about this? My experience is, that parent banks often force their daughters to buy bad securities (from parents), at least in order to reduce their taxable income.

    thats not what he says.

  4. Wow!.. guys watch that clip above that tells you what there really about.

  5. @Anon2: I think, but would need to confirm, that the regs here would make that tough.

    @Anon3&4: That's ALMOST as good as old Jack Van Impe clips.