Friday 10th November 2006
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If you believed everything you've read or watched, the finance companies are a house of cards, lending to consumers is obviously a mug's game, the writing's been on the wall forever and the only explanation for people continuing to put their money with finance companies is (at best) they were gulled by sharks, confused by the legalese or (at worst) they were greedy, or stupid, or both.
It's time for some perspective on this.
First, there's nothing wrong with finance companies per se. The 'non-bank financial institutions' sector these days has some $22.4 billion in assets, with a growing share of the overall finance market, so it's hardly a fly-by-night operation. And some of them are very solid institutions with good loan portfolios.
How can they be (you might ask) if the banks bank the solid risks and leave the dross to the finance companies? Because the banks have chosen to be very conservative, and turn away large volumes of respectable business: they still treat the salaried serf as a better risk than the self-employed, they are too scared of interest-only lending, they're not fond of cashflow-based proposals (they prefer asset backed) and they are unforgiving of any glitch in your credit history. That leaves plenty of good business for the finance companies: one told me its business model is to accept people who are one tick away from being able to tick all the boxes on the bank's application form. That's a comfortable place to be.
Some of the finance companies are well secured against property, but even the wholly consumer-oriented ones shouldn't be treated as potential pariahs. Although all three recent failures did indeed lend on cars and the like, there's nothing intrinsically wrong with lending on consumer receivables: I haven't noticed the trading banks divesting themselves of their credit card arms. Not all of us are A1 credits, and there's nothing wrong with a market that meets the needs of 'sub prime' people (as the US, with its gift for euphemisms, call them) at a price that works for everyone.
Is there an underclass of feckless, reckless and criminal borrowers ready to fleece an unwary lender and take Aunt Agatha's debenture stock with them? You betcha: I've heard some of the stories from experienced finance company managers, and they're scary. But they're not a threat to the sector as a whole: most of us are decent sorts, paying off the car or the plasma TV on time, and for most finance companies the rate they charge us covers what they lose on the ratbags.
'Greedy' depositors? That sounds to me like a cheap shot: we all make the best deals we can from the choices we face. That's not greed. 'Stupid' depositors? That doesn't fly, either. In most situations, we are all capable of making good decisions even amongst quite complex choices.
In some situations, though, our ability breaks down, and one situation applies here: when we don't have the information we need. The government, via the Ministry of Economic Development, has just put out a discussion document suggesting greater control of finance companies, and I have no trouble signing up to the bits about more effective and clearer disclosure.
The rest of it, though - two tiers of lenders, licences, character checks, formal credit ratings, the whole nine yards - looks like overkill, for many reasons.
For one, part of me feels finance companies going down are a good idea, in the same way that 'creative destruction' is good across the economy: it keeps everyone on their toes. Two, regulation didn't help a bit in the late 80s and early 90s when whole swathes of the New Zealand, Australian, Japanese, US and Scandinavian banks went belly up (or would have without bailouts and the like). Three, people can protect themselves pretty effectively without it (if you're looking for income, diversify between income-producing asset classes, and diversify whatever you're putting with finance companies across a range of them). And there aren't any great 'externalities' (knock-on effects, in this context) that warrant it: the discussion document lists a possible threat to the international reputation of New Zealand's financial system. Yeah, right.
The real harm to be prevented is the wipeout of bewildered Aunt Agatha. It's not in the current official proposals, but I'd prefer a (modest) level of deposit insurance, financed by levies rated according to a company's gross level of loan losses. The most vulnerable get some protection, the worst lenders pay for it. Slick, huh?
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