Reserve Bank Governor Adrian Orr says retail banks are using regulatory capital settings as an excuse for non-competitive behavior and reluctance to lend to businesses.
The central bank boss was asked, during a Finance and Expenditure Committee hearing, why agricultural borrowers were having to pay much higher interest rates than residential borrowers.
Orr said this was likely due to pricing behavior in a market that was not very competitive and supported a review which is underway in the Primary Production select committee.
NZ First MP Mark Patterson challenged that answer, saying the banks would say their ability to make certain loans was being restricted by the RBNZ’s capital requirements.
“I love hearing that because it needs to be removed from the common lexicon. It is somewhere banks can hide behind,” Orr replied.
Banks were pricing risk for the return they wanted to deliver and were not being given any instruction from the Reserve Bank about where and when to allocate their capital.
“When I last looked, banks were making some of the highest returns on capital in the world. Our risk weights are not the constraint on any behavior, that is poor analysis.”
The Governor also pushed back on the Commerce Commission's recent assessment that capital requirements were stifling competition and blocking new entrants.
“Prior to us recently raising their capital, New Zealand banks, particularly the Big Four, had the highest return on equity, almost globally,” he said.
That remains true after their capital requirements have been increased, which suggests they were able to increase their margins due to already weak competition, Orr said.
Actual solutions to banking competition were about data transferability, open banking, and other new technology — not reducing capital requirements.
“The more we chase those red herrings, the less likely it is that we will ever have a competitive financial system,” he said.
Commerce Commission chairman John Small described reviewing RBNZ’s regulatory capital settings as the number one recommendation which came out of the market study on personal banking competition.
Lift a price = kill a job
Labour MP Barbara Edmonds asked Orr whether having 42,000 people lose their jobs, as the Reserve Bank has forecast, was “a price worth paying” for getting inflation back on target.
The Governor said the way to ensure long term employment remains close to its maximum sustainable level was by achieving low and stable inflation.
It was price-setters in the economy, including wage earners, who should be thinking about the ‘sacrifice ratio’ and doing what they can to stop inflation.
“Every time someone is raising a price, it may come at the cost of less employment,” he said.
The cost of fighting inflation was not shared equally across the economy. The more stubborn prices are in some sectors, the heavier the burden will fall on others.
Paul Conway, the Reserve Bank’s chief economist, said having a more productive economy would make the job of monetary policy easier and less harmful.
He pointed to the United States which has experienced a boost in productivity allowing the economy to continue to grow while inflation also fell.
“If we're creating more value from an hour of work, that can either feed into higher wages for workers, it can feed into higher returns on capital for investors, or it can feed into lower prices for consumers” he said.
The trouble in New Zealand was that productivity was slipping, which was making monetary policy have to suppress demand even further to match the decreased output.
However, Orr said these conditions couldn't be characterized as “stagflation” because the inflation rate was coming down.
22 Comments
That doesn't explain the globally leading margins. That just explains why margins exist at all, not why we're being milked harder than most others in the world. It's because they can get away with it - don't have to trim the fat when your customers don't have competitive options
That doesn't explain the globally leading margins. That just explains why margins exist at all, not why we're being milked harder than most others in the world.
In any market where volume is relatively low, you need higher margin. No different to selling Coca Cola. I will admit that the NZ Ponzi has been one of the most lucrative in the world. But nobody was complaining at the high cost of debt servicing before Covid.
Say what? You'll need to explain that one J.C.
Assume constant prices - no increase to customer. If my minimum margin is say 30% and I need to sell a minimum of 500 units to make my business viable, how many incremental units do I need to sell if I decrease my margin to 15%?
That explains it in a nutshell. People are not in business for charity. There are two concepts: ROI and ROE (effort). Don't forget the latter.
“Every time someone is raising a price, it may come at the cost of less employment,” he said.
I would add another message to landlords and specuvestors here: - Every time you decrease your expectations on your property price or rent , this increase positive vibes in the economy. Stop being hungry greedy rats
"every point the reserve bank reduced the OCR by, every extra day it kept it too low, every dollar the government gave in Covid subsidy". Came at the cost of thousands of jobs... due the the excessive demand and asset bubbles the govt and RBNZ created -> causing inflation -> causing OCR hike and unemployment.
NOW RBNZ messed up and they say job public business owner needs to take a haircut on their margins to help the RBNZ hit its target and protect the economy and jobs.... not today Adrian.
Maybe you could try asking Chris to reduce immigration, and you could try harder to get the banks to take a haircut on their margins.. and maybe tH SOEs like AirNZ could play a part by reducing its overinflated prices which is killing business etc
Correction thinking the addition of tech in a market with poor competition and capital actually increases the negatives, it enables even worse competition, more price fixing and monopoly style markets and for even more higher risk behaviour that leads to massive crashes. Tech cannot and will never "fix" a lack in competition, and lack of capital. It actually makes for more bad behaviour and leads to lowering competition and more precarious situations. Good though for the existing banks to have an even greater hold on the market and to encourage more speculation. So there will be high bonuses all round.
Ironically the over reliance on tech has also cut accessibility to be the worst it has ever been across NZ as well (even though tech could have been designed to allow more accessibility it has been used instead to remove what little accessibility there was and reduce services & service access points). So many more people are unbanked.
It is a near guarantee that Orr is one of the worst in his job and you can pretty much take the opposite of what he says as the truth.
Banks were pricing risk for the return they wanted to deliver and were not being given any instruction from the Reserve Bank about where and when to allocate their capital.
ANZ NZ lent $19.3 billion in new home lending over the year, down from $24 billion in the September 2022 year. Housing lending market share was flat at 30.4%, with ANZ NZ's total lending book rising $3 billion to $107 billion. Housing comprises 72% of ANZ NZ's total lending. Link
Banks have migrated away from lending to productive business enterprises because the risk weights can be as high as 150%. Thus around 60% of NZ bank lending is dedicated to residential property mortgages owed by one third of already wealthy households
Your figures suggest that Bank lending in risk terms is low so perhaps Govt should follow the lead of that Incompetent Intelectual Pygmy Cullen and impose a Excess pofits tax on Banks to equate their profits to Cullens no risk ratee of return which I recall was 5% so allow a 1% extra allowance for risk against ANZ return on Capital of 12.3% even tax at corp rates would yield across Bank profits of $6 Billiion+ would raise sufiicient extra tax for Nicola Willis to use it for real benefit of NZ rather than Bank Shareholders and Directors.
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