Questions what are the risks now?

The Government taking full ownership of Kiwibank is a bailout in all but name Martien Lubberink

WITH the transfer this week of Kiwibank’s assets to a stateowned company, the New Zealand Crown has now taken full control of the bank. At an estimated cost of $NZ2.1 billion, the change of ownership has all the hallmarks of a government bailout.

Former owners NZ Post, the Accident Compensation Corporation and the New Zealand Superannuation Fund could be considered justified in wanting to get out. It was an ailing bank in the making.

The main capital ratio dropped from a healthy 13% in 2018 to 10.5% this June — the minimum level the Australian Prudential Regulation

Authority requires banks to meet in order to be seen as unquestionably strong.

Return on equity lingered at about 6% per year, while the bank’s larger competitors offered a return twice as high. Added to this were the high capital requirements announced by the Reserve Bank in 2019 and which are now being phased in.

Kiwibank has struggled since its inception.

The Government has promised to recapitalise the bank to help it grow. Whatever the bailout is called officially, it was the only realistic option. That said, the Government cited several reasons for its decision to transfer control.

One was to keep the bank in New Zealand hands. The Government has also pledged its full commitment to support Kiwibank to be a genuine competitor in the banking industry. And lastly, the transfer allows ‘‘all future profits to stay in the country — unlike the Australianowned banks’’.

But these justifications should not be taken at face value, and it is worth looking at them one by one.

The idea that keeping profits in the country automatically creates value for New Zealanders is by no means a given.

Kiwibank’s latest reported profits were $136 million, or $25 per New Zealander. This pales in comparison to the profits reported by the big four Australianowned banks: in total, about $6 billion, or $1200 per head of population.

Other banks either keep their profits or they pay them out to their owners and shareholders. In practice, these are institutional investors such as pension funds and insurance companies — some of them New Zealandbased.

Moreover, New Zealanders who own shares in Australian banks will receive dividends. Unlike the owner of Kiwibank, these Kiwi investors will benefit directly from their investments.

Lastly, it should be noted that banks have accumulated profits in New Zealand because of the increasing capital requirements. Since 2018, the four Australianowned banks in New Zealand retained profits worth $12 billion. These would otherwise be transferred to their parents across the

Tasman.

Again, these banks contribute to a stable financial system, keep profits in the country and do not need support.

In practice, all New Zealand banks are locally incorporated because of Reserve Bank requirements. Foreignowned banks operate largely independently from their parents. This has led to inconveniences.

For example, ASB bank cannot freely use new technologies developed by its