Commonwealtii Banking and Credit Control
By STERLING " WITHIN the sterling area the most detailed selection control of credit is to be found, perhaps, in the records of post-war banking in Australia. The system has a statutory basis, within the constitutional limits of Australian legislation. Control of bank lending was put into permanent form in the Ranking Act of 1945. One of the most important and drastic provisions of the legislation required the trading banks to deposit in special accounts with the Commonwealth Bank any excess of their investible funds over their average of August, 1939.
These special accounts, in effect, are the counterpart of the British system of Treasury deposit reciepts. They effectively enable the Central Bank to control the volume of funds available to the banks for holding in the form of "earning" assets. Indeed, the restrictive effects they have on bank lending are greater than many bank customers desire. These special accounts earn only per cent. per annum in interest but, on occasions when individual banks have had to borrow from the Central Bank to meet their advance commitments, the rate, charged—which is equivalent to the Bank Rate in the United Kingdom—has been 3} per cent.
Although enforced by statute, control over the pattern of bank advances has discriminated against much the same type of lending in Australia as in the United Kingdom. The policy can be modified, nowever, in respect of loans to assist primary production and hous- ing but the Central Bank determined the price of bank lending by ItKing the maximum rate of interest that might be charged. This was reduced from 41 per cent.—the rate at the end of the war—to 4i per cent: in December, 1946, and it has remained at that rate ever-since. Towards the end of last month, the Central Bank notified the trading banks of a change in official• lending policy with the object of meeting current conditions and conditions which are expected to develop in the next few months.
ADVANCES EXPAND Yet despite these restrictions on bank lending the total of advances has increased appreciably for, in Australia, as elsewhere, the trading banks have sometimes found practical difficulties which, even with the best will in the world, prevented them from making fully effective the Central Bank's directives on the types of loans to be approved. Anyhow, by the end of March this year, the monthly average of the seven trading banks' had reached £664 million, or more than treble their end-1945 figure. In the same period, trading bank deposits had more than doubled and, in March, advances represented no less than 53.5 per cent. of deposits compared with only 35.6 per cent. in December, 1945. Nevertheless, at the end of the period of more than six years, there had not been a great deal of change in the proportion of the big seven trading banks' funds which were frozen in special accounts Mt respective ratios being 35.2 per cent. in March, 1952, and 38.2 per cent. in December, 1945. As recently as January of this year the ratio was as high as 39.7 per cent:
Advances of all the Cheque-paying banks in Australia had risen to £882 million by end-March this year, an increase of about 30 per cent:-in twelve months and it is worth recording that, of the total increase of £31 million which took place in all bank's advances in March alone, no less than £20.6 million, took place in the trading section of the Commonwealth Bank which is not inhibited by the restrictions placed on the trading banks themselves. 1 he increase in advances by the trading banks was fitted into the assets structure mainly by the reduction in holdings of Government securities and Treasury bills, although the last-named have turned upwards recently. It is true that, allowing for the inevitably low level of bank advances at the end of the war, the rise in their real value during the post-war Phase is not excessive, but the significant point emerges that, despite the tight network of controls, bank advances were carried along in the wake of the general tide of inflation.
NEW ZEALAND'S PROBLEMS The credit control system developed in New Zealand is less formal than that of Australia. Under the Finance Emergency Regulations issia.2d in June, 1940, the Minister of Finance was empowered to give directions to " any person or class of persons for the time being carrying on the business of lending money for the purpose of controlling the general policy of that person or class of persons in relation to the making, renewal, and increasing of advances." That regulation remains the. basis of control, althoUgh the Reserve Bank Amendment Act of 1950 gave general powers of credit control to the Central Bank.
In practice, as in Australia, the policy, is administered by the Reserve Bank with the co-Operation of the trading banks. From time to time, the Reserve Bank informs the trading banks of the requirements of current policy and the trading banks voluntarily conform to those requirements. The trading banks refer to the Reserve Bank any marginal or doubtful cases, and all cases where special circumstances make it desirable that individual consideration should be given by the Reserve Bank, provided always that the trading bank concerned is prepared to grant the accommodation.
New Zealand has been passing through an import boom similar to that in Australia and has been confronted with equally difficult problems of adjustment. After a long period of shortages, importers stepped up their orders but they were not prepared for early deliveries in such quantities. To keep the situation in check, the Government first of all relied on restrictions on credit policy, but while it steered clear of re-imposing general credit licensing, it resorted on March 31st this year to a system of rationing importers' purchases of foreign exchange to 80 per cent. of their requirements in 1951.
This would represent a cut of more than half in the value of non- government imports in 1951, but additional funds will be made available to raise private imports this year to a maximum of £170- £180 million. Altogether, this approach appears to be more flexible than that of Australia.
Since March, there has been a reversion, in part at least, to the system which obtained prior to the establishment of the Reserve Bank, when the trading banks, working together, determined the extent of the demands that could, safely be made on the country's sterling funds and then, individually, allocated funds to their cus- . tomers on the basis of that determination. This system worked smoothly in the past and, when present bank officers regain the " know-how," it should work again. Unlike Australia, New Zealand has not had to depend on one product for the larger proportion of her export income and, for that and other reasons, her problem does not appear to be as deep-seated as that of her neighbour. The trad- - ing banks can be relied upon to help the country through this period of re-adjustment and it is doubly fortunate that her internal financial structure is sound.
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