Guarantee should include responsible lending rules

The announcement this afternoon of further details of the Government's deposit guarantee scheme is welcome, but New Zealanders should get a guarantee of responsible lending practices and responsible salary packages in return, the Green Party says.

“The deposits guarantee was a necessary response to other countries’ actions following the financial crisis,” Green Party Co-Leader Russel Norman says.

“But if the Government is going to underwrite deposits in the banking sector, then it’s time to set some rules around how the financial sector operates,” he says.

“New Zealand-based foreign banks have been lending out too much money. They have put their profits ahead of the interests of their customers and in the process have added to our overseas debt.

“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 they may not need. Banks must remove performance incentives that compel staff to compete to sell higher and higher levels of debt to their customers,” he says.

“We also need to cast some light on the pay packets of bank employees which are over $2.5 million per year in the case of ANZ National. If tax payers are to underwrite the banks to the tune of $150 billion then in return the banks need to show some restraint with their multi-million dollar pay packages.

The bank workers' union Finsec has done some good work in the area of banking reform. Some of their recommendations include:

Establishing an independent Financial Consumer Agency, co-funded by the industry and Government, that will oversee the workings of the financial sector – this already happens in Canada

Establishing a New Zealand Code of Lending Practice that requires lenders to take all reasonable steps to ascertain whether a borrower understands the implications of taking on debt and has sought independent advice and has the current capability to service the proposed borrowing

Establishing a Code of Social Responsibility for the finance industry

Strengthening the role of the Reserve Bank to license and supervise financial institutions' lending practices