Peter J Morgan
Peter J Morgan BE (Mech.), Dip. Teaching – professional forensic engineer, retired economics, mathematics and physics teacher
PART 7 of 18
Now that you have a basic understanding of how banks operate, you may find it interesting to read how ill-informed a group of major bank CEOs were and probably still are (well, they give that impression, but maybe they were just being disingenuous!). In April 2017 three graduates of the University of Auckland Business School – then CEOs of three of Australia’s largest banks – Shayne Elliott (ANZ), Ian Narev (Commonwealth Bank of Australia (CBA) and Andrew Thorburn (National Australia Bank (NAB) – talked candidly with Aviva Group CEO Mark Wilson about some of the issues facing their sector. At the time, the trio collectively managed assets worth $3 trillion (ten times New Zealand’s GDP). They spoke at the University of Auckland Business School before an invited audience. There is a transcript of the conversation on the university’s website.
Here’s a small excerpt from that transcript: Narev:
One mistake we can make is to completely underestimate the level of transformation. But, equally, we have got a pretty good hand of cards. What gets lost in the debate is (that) the social utility of banks is about maturity transformation – i.e., Shayne wants to deposit a dollar and have it on call and Andrew wants to borrow it for 30 years. We make that happen. We also know how to assess and price risk. These are the reasons why we exist.
This tells us that the then-CEO of Commonwealth Bank of Australia, parent company of ASB Bank, one of the ‘Big Four’ supposedly Australian-owned (actually, 60% of their shares are owned by residents of the USA) banks operating in New Zealand, believes that banks lend out their deposits! Or maybe he’s just lying. Whatever, the fact that the University of Auckland still has this nonsense on its website speaks volumes. More than likely, the University of Auckland still teaches this as fact – i.e. the false ‘loanable funds’ model of banking. It is noteworthy that neither of the other two bank CEOs took Ian Narev to task over his speaking such nonsense, most likely because they believe it, too. After all, all three of them were taught such nonsense – and a whole lot more nonsense besides – when they were students of macroeconomics at the University of Auckland Business School!
Another example of media ignorance as to how the banking and the monetary system actually works is from Australia – where TV commentators are every bit as ignorant as their New Zealand counterparts. On 7 June 2019, two days after the governor of the Reserve Bank of Australia (RBA) had dropped its OCR from 1.5% to 1.25%, Sky News Australia had a banner across the bottom of the TV screen (I have a photograph I took on my smartphone to prove it!) saying “RBA DEMANDS BANKS PASS ON FULL RATE CUT”. We then had a bevy of Sky News Australia’s TV commentators all displaying their ignorance by talking about how naughty and churlish the banks were for not passing on the full amount of the cut in the OCR. They gave a convincing demonstration that they all sincerely believe that banks borrow new money from the RBA at the OCR, and then add their gross profit margins to arrive at their mortgage interest rates.