Nobody knows how deep COVID-19 will cut into our prosperity. What we do know is that many will suffer their jobs and businesses being lost, especially those in tourism. We also know that when the dust settles, the public will take a long hard look at anyone who made large profits during this period of misery. None more so than our banks.
So far in response to the COVID-19 crisis, the banks have offered a “mortgage holiday”. Sadly, it doesn’t sound like a very relaxing holiday. While repayments of principal and interest can be suspended, the interest is still building up to pay back later.
If you call that a holiday, it’s a bit like one of those holidays where emails are still piling up in your inbox while you are trying to relax on the beach. Ping! There goes another notification while you are trying to read your trashy novel.
Could banks do more? Well, they could do a fair bit more, but not a whole lot. The numbers I’ll use here are averaged across the four big Aussie banks in New Zealand: BNZ, ANZ, Westpac, and ASB.
We know that New Zealand is the most profitable banking market in the world. The four big banks make about $5b profit every year. That is more than 2 cents out of every dollar this country earns. So they can certainly afford to bear some of the burden of the current crisis. But how much exactly?
The banks make most of their money through mortgages, because that is where most of our debt lies. Kiwis owe the banks about $280 billion in mortgages. By comparison, national business debt is about $122 billion, farm debt $63 billion, and personal loans $17 billion.
About half of every dollar banks earn in interest on this debt is paid back to someone else, e.g. interest on things like term deposits. I don’t know how much of this is foreign debt versus domestic, but it’s fair to say that everyone with a deposit in a bank will want that money to keep being paid out. Many people live off that income, even with interest rates at record lows.
Of the remaining money that banks receive in interest, it is again divided roughly 50/50 into costs (wages, overheads, tax) and profit. In other words, 20–25 cents of every dollar paid to the Aussie banks in interest is straight profit.
This is based on previous years’ accounts, and with the COVID-19 outbreak it is likely that profits will be lower. However based on previous year's results banks could afford to lose up to around a quarter of their revenue.
That means if banks forgo all their profit for this year, they could potentially offer a 3-month interest holiday. And I mean a proper holiday, with no interest payments required.
If there was a true interest rate holiday then landlords (many of whom have mortgages to pay) should pass that on to tenants as rent holiday.
We wouldn’t want to push this too far – the banks must remain solvent. The big risk here is if the economy tanks and many people default on their loans. This is the big unknown.
On the other hand people are less likely to default if the banks give them a proper holiday. Asking banks to give up a year’s profit from the most lucrative banking market in the world seems like a reasonable ask in difficult times.
The Reserve Bank has already stopped banks giving dividends to their shareholders, which was a good move. If they are still making profits when the dust settles, the New Zealand public will start questioning their social license to operate.
Of course if this crisis turns out as bad as some predict, a 3-month interest holiday won’t be nearly enough for many people. This is a sobering prospect and shows the scale of the debt mountain we have built up as a society. Now is the time to realise that an economy built on buying houses off each other is not a sign of success. It is a millstone around our necks. The lasting legacy of this crisis may well be finally awakening Kiwis to the need to wind up our debt-fuelled housing bubble once and for all.