RBNZ unleashes its inevitable push back after Commerce Commission recommended a rethink of banks' regulatory capital rules

The Reserve Bank (RBNZ) has delivered its inevitable push back at the Commerce Commission's draft report on competition in personal banking services, saying it disagrees with the Commission’s analysis of its regulatory capital settings for banks and recommendation these are reviewed.

The RBNZ publicly released its submission, and a press release, on the Commission’s draft report from its market study into personal banking services on Tuesday, soon after last Thursday's deadline for submissions passed.

"The current bank capital framework is the result of a careful and extensive review process that occurred recently and is still being phased in. The review included consideration of competition, and resulted in several changes to support levelling the playing field between large and small banks, while preserving the risk sensitivity of capital requirements," RBNZ Deputy Governor Christian Hawkesby said.

"Furthermore, the Commission’s suggested changes to our risk-weighting framework in the draft report would lead to very marginal benefits to competition, and could have unintended consequences and put us out of step with international regulatory approaches. We note the introduction of the Deposit Takers Act 2023, including its principles and our new proportionality framework, provide a clear scope to consider competition in our decision making going forward." 

The Commission's No. 1 recommendation

Among the 16 recommendations from the Commission to boost competition was the suggestion the RBNZ review regulatory capital settings to ensure they're competitively neutral and smaller banks are better able to compete. Speaking in interest.co.nz's Of Interest podcast, Commission Chairman John Small said if he had to rank the recommendations in order of importance, this one would place first.

"I think levelling up the prudential [capital] playing field is very important, and related recommendations to that. This is a pretty significant cost disadvantage in the order of 15% less capital that's required to be held against the same kind of housing loan by one of the big four as opposed to any other bank. And so we would really like to see that one levelled up. That's probably number one because that gives other banks a bit of a chance," Small said.

"When it comes to well defined categories of home loans, we find it difficult to understand how the risk to a bank changes dramatically [for] a first mortgage on a house with an 80% LVR [loan-to-value ratio] or something like that...[It] doesn't seem to us that it's any more risky for Taranaki Savings Bank [TSB] to hold that mortgage than for Westpac, for example."

As part of its responsibility for maintaining financial stability, the RBNZ undertook its broadest review of banks' regulatory capital requirements to date between 2017 and 2019. As a result of this, banks are required to phase in new, increased capital requirements through until 2028.

What the RBNZ does support

Hawkesby said the RBNZ strongly supports the Commission’s recommendations to speed up the implementation of open banking, reducing barriers to switching bank accounts, boosting financial literacy and improving access to banking services. New Zealand, like many other countries, has a banking market characterised by a small number of large banks with a big market share, he noted.

"As the draft report notes, large banks are able to gain significant scale, scope, and funding cost advantages compared to smaller peers. Larger banks can also be more able to sustain the investments needed to bring innovative products and services to the market, for example new payment methods," Hawkesby said.

He suggested Commission's final report, due out in August, should put more emphasis on policy changes that would result in more disruption and innovation both among the larger banks and across the banking industry as a whole.

"Combined, initiatives like open banking, easier switching and multi-banking, and improved financial literacy are likely to be mutually reinforcing. Easier switching and multi-banking will make it easier for consumers to move to providers offering innovations through more open banking. But these issues are complex and will require clear leadership, direction and prioritisation from government and industry, and resourcing to deliver. We are keen to be part of these efforts," said Hawkesby.

Ultimately, the RBNZ argues, it's the choices and actions of consumers that drive competition meaning addressing apathy and inertia is critical.

No advance copy

In the Of Interest podcast Small said the Commission hadn't given the RBNZ a copy of its draft report in advance of its release, but said "they will not have been surprised" with its content based on "conversations we've had with them." There had been "a few touch points" with the RBNZ, Small added, including him personally interacting with RBNZ Governor Adrian Orr.

"We recognise, of course, that their role is about financial stability. And all we're really asking at base is for them to think really carefully about the competitive aspects of their decisions and try and explain those transparently," Small said.

Commerce and Consumer Affairs Minister Andrew Bayly expects to receive the Commission's final report by August 20, after which the Government will consider its recommendations.