BSA Decisions Ngā Whakatau a te Mana Whanonga Kaipāho

Summary

[This summary does not form part of the decision.]

An item on ONE News reported on KPMG's latest report showing that banks collectively made a record profit in the last financial year. In the second part of the item the reporter gave a 'very basic explanation' of how banks 'make their money'. The Authority declined to uphold complaints that the item was inaccurate and misleading because it was based on the 'money multiplier' model rather than the 'fractional reserve banking' model. Although simplified, the explanation was generally correct.

Not Upheld: Accuracy

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Introduction

[1]  An item on ONE News reported on KPMG's latest report showing that banks collectively made a record profit in the previous financial year. In the second part of the item the reporter gave a 'very basic explanation' of how banks 'make their money', using accompanying graphics, as follows:

Banks make about 25 percent of their money from moving money around and charging fees like account fees and automatic payment fees.
Seventy-five percent of their money is made from borrowing and lending money out. So if you put $100 in, the banks contribute, say, $10 of their own money and hold that money or capital in reserve. They then lend the $100 out charging, say, $7.25 in interest. They pay you $5 for lending it to them. Giving on average a margin of $2.25 (that's after tax $1.62) profit on the $10 they put in.
But if the borrower fails to pay their $7.25 in interest, the bank's income disappears. But it still has to pay your $5. So in this extreme example, if that continues for a couple of years it doesn't take long to eat up the bank's $10 of capital and the bank becomes insolvent.
[That] is a brief explanation of why it is so important for the banks to remain profitable.

[2]  Sue Hamill, Don Richards, Amanda Vickers and Godfrey Waterhouse complained that this explanation was inaccurate and misleading because it was based on the 'money multiplier' as opposed to the 'fractional reserve banking' model. They argued that 'fractional reserve banking' allows banks to hold less reserves than the amount of their customers' deposits, thus enabling them to make profits by charging interest on money created 'out of thin air'. The complainants essentially argued that the item misrepresented the current banking system as one based on the 'money multiplier' model.

[3]  The issue is whether the broadcast breached the accuracy standard, as set out in the Free-to-Air Television Code of Broadcasting Practice.

[4]  The item was broadcast on TV ONE on 10 July 2014. The members of the Authority have viewed a recording of the broadcast complained about and have read the correspondence listed in the Appendix.

Was the broadcast inaccurate or misleading?

[5]  The accuracy standard (Standard 5) states that broadcasters should make reasonable efforts to ensure that news, current affairs and factual programming is accurate in relation to all material points of fact, and does not mislead. The objective of this standard is to protect audiences from receiving misinformation and thereby being misled.¹

[6]  The complainants argued that the item 'perpetuated a myth' about the banking system and failed to reveal how banks make profits. They said the reporter presented the 'money multiplier' model and omitted reference to 'fractional reserve banking', suggesting that banks require outside funding or reserves before being able to lend, when in actual fact they are able to generate their own funding in the form of deposits through the act of lending. They argued that banks are not 'intermediaries' that lend out savers' deposits, but effectively create money 'out of thin air' by making loans and profiting from the interest charged on those loans.

[7]  TVNZ argued that the reporter's explanation was framed as a simple or 'very basic' explanation of how banks make money and it maintained that this was consistent with 'a top-line explanation of how banks work'. It said that three experts on banking from KPMG, Ernst & Young and Massey University had contributed to and reviewed the explanation prior to broadcast and all agreed that it was generally accurate.

[8]  We sought additional views from the Reserve Bank and from the Massey University expert consulted by TVNZ on the validity of the reporter's explanation. Both were of the view that the complainants misunderstood the current banking system and that the reporter's statements were broadly correct given they were framed as a 'very basic' and simple explanation.

[9]  In response, Mr Waterhouse and Ms Hamill contended that these views were incorrect. Mr Waterhouse argued that the Reserve Bank had a 'vested interest'. Ms Vickers referred to the importance of ensuring that the 'present widespread misunderstandings about the way banks work are not perpetuated but are corrected'. The complainants referred to numerous publications to support their contention that the item was inaccurate.

[10]  For a broadcast to be in breach of Standard 5, it needs to be materially inaccurate or to have significantly misled viewers. The standard required of broadcasters is that they make reasonable efforts to ensure accuracy and to ensure viewers are not misled.

[11]  The 'money multiplier' model and the 'fractional reserve banking' model are economic models or theories used to explain different conceptions of how banking works or how banking should work. Models and theories by their nature do not lend to being objectively determined matters of 'fact'. It is to be expected that different views are held on the validity of any particular model, and it is not our role to weigh in on that debate.

[12]  We are satisfied that by consulting three banking experts in the preparation of the item to ensure that the reporter's explanation was accurate and consistent with orthodox views on the banking system, the broadcaster fulfilled its obligations under the standard. Subsequent to the complaints, those experts confirmed with TVNZ that they considered the item to be accurate. The Reserve Bank and one of those experts have separately indicated to this Authority that they consider the item to be accurate.

[13]  In these circumstances, we do not think it is justified for us to intervene and make a finding that the item was incorrect or that the broadcaster took inadequate care in presenting the item. We therefore decline to uphold the accuracy complaints.

For the above reasons the Authority declines to uphold the complaints.

Signed for and on behalf of the Authority

Peter Radich
Chair
12 March 2015

Appendix

The correspondence listed below was received and considered by the Authority when it determined this complaint:

Sue Hamill's complaint

1      Sue Hamill's formal complaint – 14 July 2014
2      TVNZ's response to the complaint – 8 August 2014
3      Ms Hamill's referral to the Authority – 1 September 2014
4      TVNZ's response to the Authority – 15 October 2014
5      Reserve Bank's response to Authority's request for information – 27 November 2014
6      TVNZ's response to Authority's request for further information – 3 December 2014
7      Ms Hamill's response to the further information – 15 December 2014
8      Further comments from TVNZ – 16 December 2014
9      Massy University banking expert's response to request for information – 2 February 2015
10    Ms Hamill's response to banking expert's comments – 11 February 2015
11    Further submissions from Ms Hamill – 2 March 2015

Don Richards' complaint

1      Don Richards' formal complaint – 14 July 2014
2      TVNZ's response to the complaint – 8 August 2014
3      Mr Richards' referral to the Authority – 14 August 2014
4      TVNZ's response to the Authority – 15 October 2014
5      Mr Richards' response to the further information – 15 December 2014

Amanda Vickers' complaint

1      Amanda Vickers' formal complaint – 13 July 2014
2      TVNZ's response to the complaint – 8 August 2014
3      Ms Vickers' referral to the Authority – 18 August 2014
4      TVNZ's response to the Authority – 15 October 2014
5      Ms Vickers' response to further information provided by Reserve Bank and TVNZ – 7 December 2014

Godfrey Waterhouse's complaint

1      Godfrey Waterhouse's formal complaint – 11 July 2014
2      TVNZ's response to the complaint – 8 August 2014
3      Mr Waterhouse's referral to the Authority – 19 August 2014
4      Further comments from Mr Waterhouse – 19, 20, 21 August 2014
5      TVNZ's response to the Authority – 15 October 2014
6      Mr Waterhouse's response to information provided by Reserve Bank – 7 December 2014
7      Further submissions from Mr Waterhouse – 13, 15 December 2014
8      Mr Waterhouse's response to banking expert's comments – 3, 11 February 2015

¹ Bush and Television New Zealand Ltd, Decision No. 2010-036