BSA Decisions Ngā Whakatau a te Mana Whanonga Kaipāho

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Summary

A comment made in an item on the programme Midday which was broadcast on TV One on 9 June 1998 referred to the relationship between mortgage rates and wholesale interest rates.

Mr Rawson complained to Television New Zealand Ltd that because New Zealand banks operated under a fractional reserve system, the comment was inaccurate and misleading.

TVNZ advised Mr Rawson that it had undertaken research into his complaint which had verified the item’s statement that banks borrowed from the wholesale money market to lend to their customers, and that when wholesale interest rates rose, lending rates for mortgages generally rose too. Accordingly, it declined to uphold the complaint.

Dissatisfied with TVNZ’s decision, Mr Rawson referred the complaint to the Broadcasting Standards Authority, under s.8(1)(a) of the Broadcasting Act 1989.

For the reasons below, the Authority declines to uphold the complaint.

Decision

The members of the Authority have viewed the item complained about and have read the correspondence (summarised in the Appendix). In this instance, the Authority determines the complaint without a formal hearing.

Mr Rawson complained to Television New Zealand Ltd about a statement which was made on the programme Midday broadcast on TV One on 9 June 1998 between 12.00 and 12.30pm. He contended that the statement which had referred to the relationship between mortgage interest rates and wholesale money interest rates, was inaccurate and misleading because the fractional reserve system under which New Zealand banks operated was not explained. Mr Rawson complained that the broadcast breached standards G1 and G7 of the Television Codes of Broadcasting Practice. These standards require broadcasters:

G1 To be truthful and accurate on points of fact.

G7 To avoid the use of any deceptive programme practice in the presentation of programmes which takes advantage of the confidence viewers have in the integrity of broadcasting.

Mr Rawson confirmed that the following statement was the one he believed to be in breach of the Code. It said:

Last week’s mortgage rate cuts are under threat. Banks get their money to lend from the wholesale money market. Wholesale interest rates have jumped one per cent this week.

TVNZ advised Mr Rawson that it had undertaken research into his complaint which had verified the item’s statement that banks borrowed from the wholesale money market to lend to their customers, and that when wholesale interest rates rose, lending rates for mortgages generally rose too. Because, in its view, the research had confirmed that the statement was neither incorrect nor misleading, it declined to uphold the complaint.

Dissatisfied with the decision, Mr Rawson referred the complaint to the Authority. He asserted that TVNZ had not investigated the complaint in any depth and said that he was complaining because, in his view, there was a stream of "misinformation" and "propaganda" being fed to the public about banking practice in New Zealand. He claimed that the second sentence in the statement - "Banks get their money to lend from the wholesale money market" - was an "outright lie". The complainant argued that money from the wholesale market formed only a part of the reserves that banks held against a large-scale withdrawal of deposits, that banks did not lend these reserves or deposits, but issued loans based only on a fraction of the reserves held. This, he claimed, resulted in an increase in the "money supply". Mr Rawson also maintained that the statement implied that a 1% increase in wholesale rates suggested the need for an equivalent increase in mortgage rates, when, in reality, increases in wholesale rates, while putting up banks’ costs, did so only fractionally. He requested the broadcast of a correction.

TVNZ advised the Authority that it had consulted a second financial expert who had confirmed its earlier advice that the statement had been accurate. It quoted its financial expert’s rebuttal of Mr Rawson’s claims.

In his final comment to the Authority, Mr Rawson disputed each of the points made by TVNZ’s financial expert. This debate is summarised in the Appendix.

The Authority first examines the statement in relation to standard G1. Standard G1 requires broadcasters to be truthful and accurate on points of fact. The Authority observes that the statement referred to the relationship between wholesale interest rates and mortgage interest rates and was included in a brief report on the economy in the news programme Midday. The Authority considers that the statement, although brief, and expressed in very general terms, was an acceptable paraphrasing of the nature of the connection between these two sets of interest rates. Further, it is of the view that the statement had conveyed fundamentally accurate information in a manner which would have been easily understood by the average viewer. It believes that viewers do not need, nor would expect, to be appraised of the technicalities of banking practice in a brief news report of the type included in Midday. The Authority is of the view that the statement was sufficiently accurate not to have breached standard G1.

The Authority next assesses whether the statement in question was in breach of standard G7. It notes that this standard requires broadcasters to avoid the use of any deceptive programme practice in its presentation of programmes. The Authority advises that "deceptive programme practice" has been interpreted in previous decisions to mean deceptive practices of a technical nature. Given this interpretation of the standard, the Authority does not regard it as pertinent to the complaint.

For the above reasons, the Authority declines to uphold the complaint.

Signed for and on behalf of the Authority

Sam Maling
Chairperson
29 October 1998

Appendix

John G Rawson’s Complaint to Television New Zealand Ltd – 9 June 1998

Mr Rawson of Whangarei complained to Television New Zealand Ltd about a statement regarding rates for wholesale money made during the "Money Report" segment of Midday News broadcast on 9 June 1998.

He requested that he be provided with the text of the statement but believed that it had said (approximately):

Banks get their money to lend from the wholesale money market.

Mr Rawson contended that under New Zealand’s fractional reserve system, this statement was untrue and misleading. He wrote:

… I believe it is time that your right to present material of this type, that could be classed as deliberately misleading, was tested with the appropriate authority.

TVNZ’s Response to Mr Rawson’s Formal Complaint – 3 August 1998

TVNZ responded to Mr Rawson’s complaint on 3 August 1998 after Mr Rawson had advised, via the Broadcasting Standards Authority, that he had not received a response to his complaint. On 21 July, TVNZ advised Mr Rawson that it had, mistakenly, believed his complaint to be an informal one, but would immediately proceed with a formal investigation. It further advised that it proposed to assess the complaint under standard G14 of the Television Code of Broadcasting Practice. Mr Rawson, in a letter dated 22 July, requested, instead, that his complaint be assessed under standards G1 and G7 of the Code.

TVNZ advised Mr Rawson that it had determined the complaint under standards G1 and G7, and began by identifying the passage in the programme Midday to which Mr Rawson objected. TVNZ wrote that the spoken passage had stated:

Last week’s mortgage rate cuts are under threat. Banks get their money to lend from the wholesale money market. Wholesale interest rates have jumped one per cent this week.

TVNZ said it considered that this was a correct statement. Its understanding, it continued, reinforced by the research it had conducted into Mr Rawson’s complaint, was that the wholesale money market was a critical source of funds for banks and that banks borrowed wholesale and lent that money to their customers. TVNZ added that when wholesale interest rates rose, lending rates for mortgages generally rose too. It stated:

The wholesale money comes from big lenders like local and overseas individuals and companies. They invest their money in bank bills, which are like term deposits – they have a promised rate of interest for the period of time that the money is on loan.

It continued:

The 90-day Bank Bill Rate is the indicator rate for the cost of funds and is commonly quoted when the discussion is about mortgage rates being under threat from movements in wholesale money rates. When the 90-day Bill rate rises it squeezes the profit margins of banks and prompts them to reassess the rates at which money is lent to homeowners.

TVNZ acknowledged that another source of funds for banks was the retail deposit market, and that the fractional reserve system did have an impact on wholesale money rates. It contended, nevertheless, that the wholesale market, as the principal source of funds, was the biggest factor influencing the movement of home mortgage rates.

TVNZ concluded that the broadcast had not breached the statutory standards.

Mr Rawson’s Letter to TVNZ – 4 August 1998

Mr Rawson advised TVNZ that he would, if necessary, refer the matter to the Authority but would prefer TVNZ to conduct further research into the matter. In addition, he argued:

If you check the reference from the Commission report that I gave you, you will find that banks do not "lend on" money, but that each new loan results in an increase in the "money supply", ie is a fresh creation of money.

Banks certainly never lend their retail "deposits". If you check banking practice, you will find that these are accounted as liabilities, and any commercial enterprise that was able to function by lending its liabilities would be in a very enviable position indeed.

Yes, they borrow funds from the wholesale money market among other sources as their reserves against the loans made, but the system requires that these be only a fraction of the loans made. Yes, increases in wholesale interest rates put up their costs, but thus only fractionally in relation to the loans they make.

Mr Rawson’s Complaint to the Authority – 9 August 1998

Dissatisfied with TVNZ’s decision, and after receipt of a letter from the broadcaster dated 6^th August which advised that, in line with its policy, it would be making no further comment on the matter, Mr Rawson referred his complaint to the Authority under s.8(1)(a) of the Broadcasting Act 1989.

He wrote that, in his view, the broadcaster had failed to investigate his complaint in any depth and explained his reasons for lodging a complaint on what may seem to many people to be a minor matter. He stated:

It is politically sensitive; it is a basic [point] in the understanding of how our banking system works, and it is of importance to the various monetary reform movements in this country that people are not misled in their understanding of it. It is distressing that there appears to be a stream of misinformative propaganda of this type being fed to the public, obviously concerned with confusing them on matters that have been agreed long ago by all informed sources.

Mr Rawson commented further that if TVNZ was joining this crusade willingly, then that suggested there was an element of corruption at work since those who stood to benefit from it were some of the broadcaster’s biggest advertisers.

Confirming that TVNZ had correctly identified the statement to which he objected and dismissing the first sentence as simply the introduction, Mr Rawson claimed the second sentence was an outright lie. Whether it was deliberate was of no consequence, he wrote, and argued that because it affected people’s understanding of the subject, standards G1 and G7 were necessarily contravened. The third sentence, he asserted, was "marginal" as it implied that a 1% increase in wholesale rates suggested the need for an equivalent increase in mortgage rates.

He requested the broadcast of a correction of the statement and suggested the following be included:

Money from the wholesale market acts as part of the reserves banks hold against possible large scale withdrawal of deposits, and these reserves are only a fraction of the [money] they lend.

Banks never lend their reserves or their deposits, (the latter are accounted as liabilities), but every new bank loan results in an increase in the money supply ie banks create money in the process.

Increasing costs of wholesale money do increase their costs, but only by a small fraction of the business they carry out.

Mr Rawson appended, in support of his submission, material relating to the findings of a Royal Commission and part of an article from the Herald.

TVNZ’s Response to the Authority – 1 September 1998

Responding to the Authority, TVNZ advised that in assessing Mr Rawson’s original complaint, it had taken advice from legal and financial experts before reaching its conclusion that the passage referred to was neither incorrect nor misleading. It had since, it wrote, checked with another financial expert who had advised that Mr Rawson’s suggestion to the Authority as to how a "correction" might be worded was seriously flawed. TVNZ paraphrased its "financial expert’s" rebuttal of Mr Rawson’s arguments in the following way.

i) … that any money from any source needs to be lent out by the banks. Otherwise, they will be paying a price for the money while receiving no income. This fact should be compared with the first sentence of Mr Rawson’s "correction" where he refers to "reserves". He is confusing "reserves" with minimum capital requirements, as determined by the Reserve bank.

ii) The cost of borrowing by way of mortgage is unquestionably affected by the key 90-day rate. If the bank’s cost of funds is greater than the mortgage rate for any length of time, the bank will lose money. (This refers to the third sentence of Mr Rawson’s correction".)

iii) In his second sentence, Mr Rawson is missing the step between taking a deposit and lending out the proceeds. This is a cornerstone of banking since time immemorial.

iv) Mr Rawson may be aware that one of the major contributors to New Zealand’s current balance of payments malaise is the large offshore borrowing by New Zealand banks on the wholesale money market to satisfy massive housing loan demands. The Governor of the Reserve Bank, Dr Brash, has frequently referred to this.

In conclusion, TVNZ reported that its "source" had confirmed that the Midday piece had been accurate and that he had suggested that Dr Brash, Governor of the Reserve Bank, would confirm, if the complainant wished to check, that the major driver of mortgage rates was most certainly the 90-day bank bill rate.

Mr Rawson’s Final Comment – 10 September 1998

In his final comment, Mr Rawson referred to the material relating to various Royal Commissions (Canada, Australia, Britain and NZ) that he had enclosed with his referral and maintained that it was half a century since any reputable authority claimed seriously that banks "lend-on" money, or that every loan they granted did not increase the money supply or create new money. He contended that the thousands of millions of dollars increase in the money supply over recent years, was due to the bank’s "creation of new money", and stated:

This fact obviously embarrasses many bankers, and that is one reason why data from the various Royal Commissions must be regarded as ultimately authoritative. These are the situations where banking representatives were testifying under oath before judicial bodies.

The complainant wrote that it was unfortunate that there seemed to be a semi-official campaign which sought to confuse the public on the issue and stated that he wished to comment in detail on TVNZ’s letter, a copy of which he enclosed with the paragraphs numbered for reference.

With regard to the fact that TVNZ had consulted an "expert", he pointed out that he was not basing his complaint on personal opinion but on factual material from authoritative sources. It appeared, he wrote, that TVNZ had not used knowledgeable sources. The complainant then referred to the points made by TVNZ’s "expert" which had been paraphrased in its letter of 1 September to the Authority.

In relation to points i) to iv) [as listed above] he stated:

i) … How anyone who claims this status [of "expert"] could be unaware that the banks would be gaining income from their loan operations in the mean time is beyond me. This appears to be a silly statement designed to cloud the issue. Referring to the last sentence, I was referring to "reserves" in the sense of money needed to cover any possible run on a bank, in the same sense as the official "fractional reserve" description of the system that allows the bank to multiply the money supply from a lesser base.

ii) It is pointless to deny that banks lend and borrow and make a large part of their profit from the difference, which is why I referred to this sentence in the original statement as "marginal". I do comment that a lot of money banks borrow comes in as demand deposits, upon which little or no interest is paid, and that the banks tend to have control over the interest they pay on other deposits.

iii) Nor can I detect any reference to this magical "second step" in evidence presented to the Royal Commission. Had it any relevance to the manner in which banks create money, I am sure it would have been highlighted.

iv) On pages 45–46 of the Royal Commission Report there is a clear statement of the relationship between overseas funds and New Zealand currency. There is no need for overseas funds for the creation of New Zealand dollars by the trading banks on the Reserve bank; builders, plumbers, timber merchants etc are not ever paid pounds, marks, US dollars or yen. The overseas funds are available for purchase of imports etc, and form reserves for the banks against demands in that direction. This can not apply to any great extent to housing, because the overseas content of the average house is, I think, well below ten percent. I am sure that the fear behind Mr Brash’s statements is that high expenditure on housing could result in demands for imports of cars, electronic goods etc. and affect our balance of payments.

Referring to TVNZ’s contention that the Governor of the Reserve Bank would confirm that the major driver of mortgage rates was most certainly the 90-day bank bill rate, Mr Rawson suggested that this was possibly an attempt to turn attention away from the main thrust of his complaint which was the inaccurate statement about the function of banks in relation to the creation of new money.

In conclusion, the complainant listed the "specific evidence" contained in the material he had supplied to the Authority which he believed supported his contentions with regard to his complaint.