TLDR: PM Jacinda Ardern lectured bank boards and managers last night about their high profits showing they were not demonstrating their ‘social license,’ but she stopped short of suggesting any sort of windfall profit tax as used elsewhere and as proposed by the Greens last month.
Instead, Ardern said she hoped her jawboning of the banks would make a difference, even though it hasn’t in the past.
Paying subscribers saw and heard more detail and my analysis of the prospects for a windfall tax below the paywall fold and in the podcast above earlier, including the PM’s answer to my windfall profit tax question and the idea such a tax could help the Reserve Bank fight inflation.
Just jawboning? Or prep for a windfall profit tax?
Prime Minister Jacinda Ardern appeared to lay the groundwork for the introduction of a windfall profit tax or levy on bank profits yesterday, although her views are still a long way from any policy work.
Asked in her weekly post-Cabinet news conference about Westpac’s record-high core annual earnings of $1.551b, up 17%, Ardern criticised banks for consistently producing very high profits at a time when others in the community are struggling.
She did not suggest a particular policy to reduce or tax bank profits, but said banks were not demonstrating "social license" and needed to 'engage in some self-reflection.'
Windfall taxes on bank profit margins that are rising because of higher official interest rates have been considered in Britain and Europe. Australia imposed an annual 'Major Bank Levy' of 0.06% of the liabilities of banks with more than A$100b of assets in mid 2017, which included Commonwealth Bank (the owner of ASB), ANZ Bank, Westpac, National Australia Bank (the owner of BNZ) and Macquarie Bank. That extra tax on banks was imposed by a conservative Liberal-National Federal Government in July 2017 and is expected to raise A$1.85b per year by 2024/25.
Ardern's comments follow calls from Green Finance Spokesperson Julie-Anne Genter last month for a windfall profits tax on large corporates that benefited from Government support and implied guarantees during the Government's covid response.
‘Perhaps they’ll listen to me this time’
Ardern said the banks generally had not demonstrated 'social license' by repeatedly making very high profits at a time their community was struggling.
"They all seek the same social license. They exist in the community. They know that this is a time where New Zealanders are facing increases in the cost of living like many other of our international counterparts," Ardern said.
"The question I would pose to them is they may be operating as other banks are, but are they demonstrating social license? Are they demonstrating commitment to the communities they are serving by taking profits such as those in these current times. That would be my question," she said.
Asked if they were demonstrating social license, she said: "No."
Ardern agreed the banks were complying with the law on taxes.
"They're continuing to operate within the parameters in the rules that are set, but that doesn't mean that necessarily it's giving them a social license that you would expect from banks who claim to be operating as members of the community and within the community," she said.
"Some have said things like windfall tax. That's actually a very different set of scenarios usually for those where it is being applied. Offshore, you will see in different scenarios they've applied it to, for instance, energy companies who have benefited from particular events," she said.
"The argument here is actually this is a very different set of circumstances. We've seen repeated significant profits being drawn by banks in New Zealand. So this is not what I would argue is a one-off. We've seen this consistently, them posting significant profits. I think there's questions need to be asked to management of these banks as to whether or not they're serving their communities well."
'I don't have a policy solution. Yet.'
Ardern said the Government did not have a policy to address the high profits and said any questions on specifics should be addressed to Finance Minister Grant Robertson. She would not say if the Government was considering naming banking as the next sector for a market study by the Commerce Commission.
"We don't have any particular policy that would have an impact on what we are seeing, but not everything that should change, will change, at the hands of government," she said.
"It is not unusual, of course, for companies or indeed other operators in our communities to assess whether or not what they're doing at any given time is the right way from a corporate responsibility perspective to be behaving. It doesn't always take government intervention for that kind of self reflection to occur.
"I'm simply being frank with you around my observations around what is occurring with bank profits. Do I have a current solution from government on that? The answer is no. But I do share a view as obviously someone that takes a perspective on the behalf of the welfare of all these Zealanders that what we see I don't think is justifiable.
"So I'm not coming here with a policy prescription, but I'm sharing a view. I don't currently have in front of me a Commerce Commission market study that can tell me exactly that level of detail that I can for, for instance, for the grocery sector.
"We know that from the Commerce Commission's work, that the grocery sector in New Zealand is taking excess profit of roughly a million dollars a day. Now I don't have that evidence base in front of me now for the sector.
"I'm sharing a frank view, but beyond that I don't have a policy prescription."
'There is something wrong with bank profits'
Asked if there was something wrong with the level of bank profits, she said:
"In this environment, yes. I'm not speaking to every individual bank and the situation in this market. I'm giving a general response to a question that was asked without giving a policy prescription."
Asked if banks' job was simply to make the biggest possible profits for shareholders, she said:
"Sure. But then on that basis at the same time, you see some banks promoting the fact that they are taking an environmentally responsible line by for instance, offering lower interest rates, the decarbonisation initiatives buying EV cars, insulating your home."
"They frequently make decisions that may be seen to be less about profit and more about social corporate responsibility. I'm just asking them to broaden the remit of consideration in that regard, The point I'm making is normal solutions to these questions don't solely come from government.
"Maybe banks themselves may look at their profits that they're posting in this current environment. And ask the question of whether or not in this current environment there is a way that they can support their customers through this period as well."
Asked if 'self reflection' would be enough to change their views, she said:
"Obviously that self reflection has not bought change to date, but in this current environment where we are experiencing a significant cost of living issue for all New Zealanders, I feel a responsibility to call on all those who may have the ability to ease that pressure to consider how they may do so and I include the banks in that."
So what? - The PM was in floating mode yesterday. In previous weeks she has downplayed the idea of a windfall profit tax, as has Robertson. We’ll get another chance this morning to ask them both about their views.
What they should do - Taxes on windfall profits earned by banks when official interest rates are being lifted are nothing new or politically biased. Margaret Thatcher did one in the early 1980s. Scott Morrison did one in 2017, which is still in place for the very banks that would be subject to it here.
The case for a windfall profit tax or levy - Aotearoa’s Australian-owned banks benefited during covid from the removal of lending restrictions, the printing of $55 billion of money by the Reserve Bank to lower longer-term mortgage rates and the lending to banks by the Reserve Bank of $16.4 billion at discounted rates through the Funding for Lending Programe (FLP), including a further $400m as recently as last Monday, as this RBNZ data shows.
Now, as the Reserve Bank hikes interest rates to slow inflation caused partly by the money printing and cheap loans that pumped up residential land values by 45% or nearly $1 trillion, the banks are benefiting again as they are able to increase their net interest margins.
The Crown can also rightly claim the banks benefit from an implied and unfunded Government guarantee to protect them, especially now the Government is building a deposit guarantee scheme and especially after the Government’s actions during the Global Financial Crisis, when the Government created retail and wholesale deposit guarantees in 2008/09.
In my view - During the GFC and covid, the losses were socialised in the form of higher Crown debts, while the profits were privatised in the form of higher bank profits. Recovering some of those privatised profits would not only be fair, but if done in a fiscally neutral way (ie not simply using the funds to increase spending elsewhere), it would tighten fiscal policy and help the Reserve Bank bring down inflation by not having to put up interest rates quite so much.
An Australian-style bank levy of 0.5% on the banks’ loans of $535b would raise $2.66b per year and reduce their current ‘run-rate’ of annual profits from $7b per year to around $4.3b per year.
I’ll do a tweaked stand-alone version of this later on today after hearing from Robertson. Do paying subscribers want it opened up immediately?
Elsewhere in the news here and overseas overnight and this morning:
In geo-politics, the global economy, business and markets
China trade contraction - Data out overnight showed China’s exports and imports contracted in October from September, which was worse than expected and another sign our largest trading partner is slowing under the weight of covid lockdowns and a residential property implosion; Reuters
‘A highway to hell’ - United Nations Secretary General Antonio Guterres called on leaders attending COP27 in Sharm-el-sheikh to cooperate urgently to slash emissions or condemn future generations to a climate catastrophe “on a highway to hell”; Reuters
In real life - Facebook’s parent Meta will announce the sackings of thousands of its 87,000 staff as early as Wednesday, having added over 40,000 staff since covid, the WSJ reported;
Covid hits - Apple warned overnight of lower iPhone shipments because its factories in China had been badly affected by covid; Reuters
In Aotearoa’s political economy
‘Neck and neck’ - Polling from Labour’s pollster Talbot Mills emerged late yesterday to show Labour steady on 35%, National down three points on 35%, with ACT on 11%, the Greens on 9%, NZ First on 4% and Te Pāti Māori on 2.2%; prior month, with National down 3 points. This contrasted with a Newshub-Reid Research poll out on Sunday evening showing National-ACT able to govern alone and Labour at its lowest level since the election of Jacinda Ardern as leader. She said she took the Newshub poll with a grain of salt and thought the Talbot Mills poll was more accurate. NZ Herald
A breach of NZX rules? - The Auckland Mayor’s office leaked information about a $270m budget shortfall to the NZ Herald over the weekend, forcing the Auckland Council to send a note about the situation to the NZX, where its coporate bonds trade. The leak appeared to breach NZX rules about market sensitive information being made publicly available to all at once. The final detail referred in the article was published five hours after it appeared in the Herald and two hours NZX after trading began.
Another breach? - Mayor Wayne Brown then proceeded yesterday to give his first full and exclusive interview to NZ Herald-$$$ reporter Bernard Orsman, detailing plans to make $400m in property development profits on Ports of Auckland-owned waterfront land, potentially selling the Council's $18% share of (also NZX-listed) Auckland Airport for $2b and potentially slashing funding to local boards.
Fraud in Parliamentary office - The Parliamentary Counsel Office’s (PCO) Chief Information Officer (CIO) for 13 years, Paul Ivan De Wijze, was named yesterday as having been convicted of fraud after falsely invoicing the PCO for $55,200 for a cloud-based IT service as an act of ‘revenge’ after being laid off last year after 13 years in the job. The money was directed into his own account. He was convicted and sentenced to community work after he repaid the funds, the NZ Herald reported after his name suppression was lifted. De Wijze had applied for permanent name suppression.
Quotes of the day
When AC/DC meets Mad Max in a UN speech
"Greenhouse gas emissions keep growing. Global temperatures keep rising. And our planet is fast approaching tipping points that will make climate chaos irreversible," he said. "We are on a highway to climate hell with our foot on the accelerator." United Nations Secretary General Antonio Guterres via Reuters
Wayne Brown jumps off the Council’s financial difficulties
“The guy jumping off the tower and it falling down behind you. I expected it to be slow, bureaucratic, bloated and in financial difficulties and it met all of those, and it’s more financial difficulties than I thought. It’s like every time you lift a stone here, slaters run out in every direction.” Auckland Mayor Wayne Brown telling Bernard Orsman what his first weeks in the job felt like, in his first full interview. NZ Herald-$$$
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