New Zealand gets its chance for some Australian-style bank political theatre

Starting this week MPs from two parliamentary select committees have the chance to "grill" bank bosses when they "front up" to the parliamentary banking inquiry.

First up this Wednesday will be Antonia Watson, who as my colleague Dan Brunskill put it is CEO of ANZ New Zealand and a reluctant capital gains tax advocate. Other CEOs, and their minions, will follow over coming weeks.

This inquiry promises to be very different to the Commerce Commission's recent market study into personal banking competition. That's because it involves politicians. And it's a broader probe.

The inquiry stems from the coalition agreement between National and New Zealand First. However, expect the third coalition party, ACT, to get its oar in too.

The fact that it involves two select committees, the Finance and Expenditure Committee chaired by National's Stuart Smith, and the Primary Production Committee chaired by Act's Mark Cameron, is noteworthy. Importantly it's also looking at rural and business banking, which the Commerce Commission didn't do.

Amid competition for the rural vote among the coalition partners, influential lobby group Federated Farmers' submission gives a taste of what it's looking for.

There's no doubt the desire for this inquiry taps into a sense in New Zealand that until now we've missed out on the chance to "grill" bank bosses in the way the Aussies have done through the likes of their Royal Commission and Financial System Inquiry. For this school of thought the Financial Markets Authority and Reserve Bank conduct and culture probe didn't cut the mustard.

The inquiry's terms of reference call for a spotlight being put on banks', and the Reserve Bank's, climate, environmental and sustainability policies, issues bound to yank the chains of some submitters and politicians.

More than 140 written submissions have been received, with more than 60 submitters asking to speak at a hearing. The wildcard of submissions from individuals, in person, could be interesting. Who knows what they might throw up?

The ingredients are thus there for some Aussie-style banking political theatre, even bank bashing. 

At the very least expect some political point scoring, grandstanding and active lobbying. Hopefully too, some worthwhile discussion on the state of New Zealand banking and competition.

'Common misconceptions'

The terms of reference highlight an interest in banks' return on capital from business, rural, and residential mortgage lending; the level of interest rates charged to each sector; and an assessment as to why there has been a reduction in the proportion of lending to the productive sector relative to residential mortgage lending.

In its submission ANZ, the big kahuna of NZ banking, says whilst returns on equity from its personal, rural and business banking fluctuate over time, rural has been the lowest returning segment over at least the past four years. ANZ doesn't provide specific numbers but says it's happy to do so for the select committees, on a confidential basis due to commercially sensitivity.

ANZ also maintains there's a "common misconception" rural and business lending rates are significantly higher than home loan rates. This is probably in part because a higher proportion of rural customers use floating rates, higher for all customers than fixed rates, the bank says.

ANZ also cites "a misconception" banks favour home loans over business and rural lending because home loans have lower capital requirements. It argues economic factors have primarily driven the change in the proportion of lending to the productive sector relative to residential mortgage lending, rather than regulatory capital requirements, saying:

Home lending growth accelerated during 2020 and 2021, in particular in the very low interest rate environment following COVID, increasing demand from customers and increasing property values. As interest rates increased home lending growth slowed.

Business and agri lending increased at a slower pace than housing. During COVID, many business and agri customers chose not to increase debt due to the uncertain economic environment. During the low interest rate period some business and agri customers took advantage of the lower interest rate environment to reduce debt levels, rather than increasing debt. ANZ NZ saw an increase in agri loan amortisation during this period as customers built a more sustainable balance sheet. As interest rates have increased, agri customers have moved to interest-only loans to mitigate the impact of high on-farm (operational) and interest costs. Paying down debt during the low interest rate environment provided the buffer that has allowed customers this option. 

As a result, home lending has increased from ~58% of the total bank lending at September 2019 to ~64% of bank lending at June 2024. We believe the change in mix is primarily driven by customer demand and economic factors rather than capital settings. Despite recent growth in the home loan market, we still have more capital invested in New Zealand businesses and farms than home loans.

As of June 30, $108.405 billion, or 71%, of ANZ's $152.055 billion of total loans was housing lending.

Also on return on capital, in its submission BNZ says;

BNZ does not differentiate the 'return on capital' that is required between business, rural or residential mortgage lending. While the 'amount' of capital that is required to support loans will differ for each unique loan - the return required for each dollar of capital does not change.

Reserve Bank under the spotlight

The Reserve Bank, of course, won't escape scrutiny. For example, expect criticism its conservative regulatory capital settings and financial stability oversight hinders credit access and competition.

Speaking after the release of the Commerce Commission's final report from its market study, Finance Minister Nicola Willis said; "we've let the balance go so far that in fact we're promoting financial stability at the cost of competition."

Willis also said the Government would act on all 14 recommendations from the Commerce Commission’s report, increasing public expectation for improved banking competition.

The smaller financial institutions striving to compete with the ANZ, ASB, BNZ and Westpac oligopoly will also point fingers at the Reserve Bank.

A joint submission from The Co-operative Bank, Heartland Bank, Kiwibank, SBS Bank and TSB Bank highlights their old chestnut of the big four banks' advantageous capital position. (Rabobank's submission does the same). This centres around the big four banks being allowed to use what's known as the internal ratings-based, or IRB capital methodology, whilst other banks must use the standardised methodology.

Under the IRB approach, banks set their own models for measuring credit risk exposure which they must get approved by the Reserve Bank. In contrast the standardised approach used by other banks is set by the Reserve Bank.

This scenario "entrenches a material competitive advantage for entities whose scale means they in no way require it and which continues to act as a barrier for smaller providers to meaningfully compete," the group of smaller banks argues.

The Commerce Commission also highlighted this issue. Its draft report recommended; "the Reserve Bank reviews its prudential capital settings to ensure they are competitively neutral and smaller players are better able to compete." Chairman John Small described this as the most important of the 16 recommendations in the report.

The Reserve Bank, however, pushed back hard, with Deputy Governor and General Manager of Financial Stability Christian Hawkesby telling interest.co.nz;

We operate in an international world where we have the internal ratings based approach, the IRB approach, for large sophisticated financial institutions who do have the resources and the ability to model risks more accurately. And it's a fundamental part of the international approach [to bank regulatory capital requirements] for that to be recognised, and for those institutions that can have a more granular analysis of risk for there to be some incentive for them to apply that. And so it's important that still remains an element to the framework. And so if we remove that capital treatment, we're effectively discarding that internationally accepted approach for little benefit.

The supposedly number one recommendation was gone from the Commerce Commission's final report, with Small saying; "we've got a bit more refined about how we're suggesting that that happens."

It's worth noting the parliamentary inquiry's terms of reference say it should; "where relevant, reference the findings of the Commerce Commission’s study into banking competition."

(There's more background on the capital requirements for the big four versus other banks here).

Who is and isn't a bank?

In their submission a group of non-bank deposit takers (NBDTs) ask to be allowed to call themselves banks, and say if the Government wants to create any meaningful competition in consumer lending, the Credit Contracts and Consumer Finance Act "must be significantly overhauled."

This is particularly in relation to the disclosure requirements – where there are eight separate types of disclosure required, very little of which provides meaningful value to consumers. However, the risks of non-compliance for even a technical breach can be extremely severe, being in the most extreme cases refunding the whole cost of borrowing, not just the margin earned on loans.

This NBDT group includes Heretaunga Building Society, Finance Direct, General Finance, Wairarapa Building Society, Xceda Finance, Mutual Credit Finance, Gold Band Finance, Christian Savings Limited, Nelson Building Society and Unity Credit Union.

Fintech Dosh, which is seeking banking registration from the Reserve Bank, wants the minimum $30 million initial capital requirement replaced by a tiered requirement proportionate to risk.

'The highest impact action govt could take to drive competition & transfer wealth from banks to customers'

Both the NBDTs and Dosh want in on the Reserve Bank's Exchange Settlement Account System (ESAS). ESAS accounts are remunerated at the Official Cash Rate (OCR).

Those with these accounts currently include ANZ, ASB, ASX, BNZ, Bank of China, China Construction Bank, Citibank, HSBC, ICBC, Kiwibank, NZX, the RBNZ, TSB, CLS (Continuous Linked Settlement), the Local Government Funding Agency, Treasury's Debt Management Office, the NZ Super Fund, Rabobank and Westpac.

The Reserve Bank has a long running review of the settlement accounts underway, recently saying it agrees with the Commerce Commission that broader access to the accounts could "benefit both innovation and competition through its use as an input into payment services as well as an account that provides access to OCR returns."

The NBDTs say;

The Finance and Expenditure Committee should ask the Reserve Bank to finalise its policy on exchange settlement accounts (ESAS) and require them to be available to all prudentially regulated entities.

While not raised by the Commerce Commission, we also believe the Reserve Bank should be asked to provide liquidity facilities to all prudentially regulated entities (not just banks). Both this and access to ESAS accounts would have significant positive impacts on both competition and financial stability.

In its submission Dosh says;

Currently a barrier preventing competition in banking and a direct driver of higher consumer prices, is the accessibility of the Exchange Settlement Account System (ESAS). This system gives registered banks the opportunity to place capital with the Reserve Bank earning the Official Cash Rate (OCR) in interest. This enables banks to lay off customer deposits and earn the OCR.

If more financial services providers (FSPs) were able to do this, they would be able to pass the improved rate that they earn to customers, significantly improving the rate that customers earn on deposits.

This has a further benefit of reducing potential conflicts of interest that arise from Bank’s providing retail customer deposit rates, while also setting rates for FSP competitors in the market. This would limit non-bank FSP’s exposure to incumbent banking rates by giving them access to wholesale rates.

In essence broader access to ESAS would allow a wider range of FSPs to offer better interest rates to consumers, and would have a flattening effect on prices. This is the single, highest impact action that the Government could take to drive competition and transfer wealth from banks to customers.

(There's more on the ESAS system here).

Buckle in

Dosh also wants "selected entities" registered as financial service providers on the registrar overseen by the Ministry of Business, Innovation & Employment to gain access to the ESAS. They should meet minimum criteria such as; a minimum of two years track record of managing customer deposits for each customer segment they are sourcing deposits, a minimum of $5 million customer deposits under management, and at least one anti-money laundering/ know your customer audit completed and available for review, Dosh suggests.

It also wants Reserve Bank restrictions on the use of the term "banking services" loosened to allow non-bank financial service providers to use this description for their services.

So buckle in. There's plenty of water to flow under this particular bridge over coming months.

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