Banking inquiry acknowledges it's no silver bullet for competition

The Reserve Bank should set up a new Prudential Policy Committee to monitor market efficiency, according to a cross-party inquiry into banking competition.

Parliament's finance and expenditure committee has released its report from the inquiry, but has acknowledged its findings will not be new to the sector, and unlikely to be a silver bullet for competition.

The committee met over the course of 13 months, hearing from 216 organisations and individuals.

Its inquiry found New Zealand's big four banks' (Westpac, ANZ, ASB, BNZ) focus on lower-risk activities like retail banking would usually see lower returns, but they actually had higher profitability than international peers.

The big four disagreed with such a conclusion, submitting their profits were reasonable given their high capital strength and the financial stability they provide the economy.

The current regulatory environment was too strict and placed higher costs on the industry, making it harder for smaller banks and non-banking deposit takers to compete.

The report makes 19 recommendations, including requiring banks to disclose their profitability on transaction, on-call, and savings accounts.

It also suggested banks standardise their processes for residential, business, and rural customers, by agreeing on standard financial information and using digital technology to make it easier to compare products and loan options across banks.

Lowering the barriers for overseas banks and fintechs to enter New Zealand would also increase competition, the report said.

Guidelines on how banks apply climate-related disclosures were also recommended, with some on the committee questioning the need for the disclosures entirely.

Some submitters argued the requirement for disclosures increased interest rates for rural customers, but the report was unable to conclude this was the case.

A lack of representation of Māori needs in the financial sector was also found, with the committee recommending banks jointly adopt voluntary service standards to better understand Māori needs, and the government remove anti-money-laundering compliance barriers for Māori land trusts and Māori organisations with multiple owners.

Some recommendations taken up

Committee chair Cameron Brewer said many of the inquiry's recommendations were already in play.

The Reserve Bank is already reviewing the capital settings for deposit takers, including capital requirements for banks (how much capital banks hold in reserve).

Cabinet also recently gave Kiwi Group Capital approval for a $500 million capital raise to fund Kiwibank's growth and help it compete against the Australian-owned banks.

The report suggested the Reserve Bank cease planned incremental increases to capital requirements, review capital ratio requirements and compliance settings for smaller banks, and look at settings to support market entry of additional banks (such as the $30m initial capital requirement).

It also suggested the Reserve Bank establish a Prudential Policy Committee, to sit alongside the Monetary Policy Committee, which would independently monitor the Reserve Bank's prudential performance and progress in establishing market efficiency.

That said, the committee acknowledged it had come to the same conclusions as a recent Commerce Commission market study into banking.

"We know that our summary of some of the key issues will not be new information to the finance sector. Our recommendations are also unlikely to be a silver bullet for competition, and it now falls to the various government agencies to determine how to implement and respond to our recommendations," the report said.

Differing views

Opposition parties disagreed with some of the recommendations, with Labour sticking to its long-held position that Kiwibank should stay in public hands.

It also disagreed the capital requirements should be relaxed, and said the Prudential Policy Committee was a "distraction" that would not address competition concerns.

The Green Party and Te Pāti Māori also want Kiwibank to permanently remain Crown-owned.

The Greens did not believe making it easier for overseas banks to open in New Zealand was the solution to improve competition, saying it would only entrench the flow of profits offshore.

Brewer said he had pushed hard for cross-party consensus where it was possible.

"Political consensus on most recommendations is important because it will help keep the pressure on the regulators and banking sector," he said.

Labour MP Arena Williams, who is not a member of the committee but participated in the inquiry, said it had been a great opportunity for bipartisan discussion about the problems in the market.

But she said coalition MPs were more focused on the prudential rules when they should have been focused on what would drive down competition and bring home loan prices down.

"This inquiry has found that the prudential rules are the problem, at a time when the Commerce Commission is pointing squarely at a lack of competition between the big four banks and Kiwibank as the problem in our market," she said.

She felt the inquiry could have found more common ground on Kiwibank.

"The government has talked a big game about capitalising Kiwibank, but we know that everyone agrees Kiwibank will be capital constrained in the future. That means it won't be able to drive down the prices of home loans that we're actually seeing it manage in the market now, and so that'll have a long term impact on New Zealanders who want to get into home ownership and want to save for the future."

The Greens co-leader said the inquiry was a missed opportunity and the major recommendations from the report are really just "tinkering around the edges".

Chloe Swarbrick said the report was "relatively helpful, but doesn't go far enough".

"It's a hugely missed opportunity.

Not only that, she said, but it was also "mind blowing" there was contemplation the only way to deal with KiwiBank's capitalisation was to turn it into "potentially another overseas owned bank", thus turning the "Big four potentially, eventually, into the Big Five."

"It doesn't deal with the fundamental issues here."

Swarbrick said the Greens would have liked to see "bold, meaninful recommendations" which had cross partisan agreement.

"There seems to be at least somewhat relative agreements that the big banks are extracting far too much profit from New Zealanders, but not any meaningful consensus on actually addressing that."

She said addressing that could look like "structural separation" which the government can legislate for, as well as considering how to capitlise KiwiBank without "selling it off".

She also raised an issue around how the select committee operated, which people had expected to work in a cross-party way. She criticised the way the government side of a select committee, and reflected on both the Labour and National led governments, "tend to take their lead from the executive".

"Which is not what we should expect when it comes to the separation of powers between the legislature and the executive.

"The way in which the Minister of Finance has celebrated the findings today potentially speaks a bit more to the government's agenda than the opportunities that we had for meaningful long term transformation in this space."

Government response

The government has 60 working days to respond to the recommendations. Every six months the banks and other relevant entities will be invited to return to the committee and report on their progress towards implementing the recommendations.

Finance Minister Nicola Willis said the report would support the government's continuing effors to improve competition in the banking sector.

"This includes open banking, competition in prudential policy decision-making, and giving Kiwibank scope to raise capital to become a disruptive competitor," she said.

"Additionally, we look forward to the outcome of the Reserve Bank's review of key capital settings for deposit takers. We want to see settings that preserve financial stability while encouraging investment, job creation and income growth."

The recommendations in full:

State of competition in banking:

• Standardise credit information and make it easier to compare loans
• Open the door to more overseas banks and fintechs
• Strengthen Kiwibank through investment
• Review fees and profits on everyday accounts
• Barriers preventing competition in banking and impact of the regulatory environment

Revisit Reserve Bank prudential settings:

• Evaluate capital settings
• Broaden the "regulatory sandbox" trial
• Cut Council of Financial Regulators overlap
• Make climate lending rules clear and consistent
• Push for real-time payments
• Improve Payments New Zealand
• Address limits on growth of non-bank deposit takers and fintechs

Rural and business banking:

• Cease capital increases for banks
• Review rural requirements
• Formal disclosure of factors

Lending to Māori asset holders, organisations, businesses, and individuals:

• Set voluntary Māori banking service standards
• Remove anti-money-laundering (AML) roadblocks for Māori land trusts
• Enable Māori co-investment in infrastructure
• Create Māori-focused lending products