SBS Bank CEO Mark McLean says Kiwibank’s $500 million capital raise could strengthen competition at the top of NZ’s banking oligopoly but won’t help challenger banks to compete

A challenger bank says Kiwibank might “enhance” competition at the top of New Zealand’s two-tier banking oligopoly — but it won’t level the banking playing field for NZ’s smaller players.

SBS Bank chief executive Mark McLean told Parliament’s banking inquiry on Wednesday that boosting Kiwibank won’t help other smaller banks with competition issues in NZ’s banking sector.

“While the recapitalisation of Kiwibank may enhance competition by adding the fifth major bank to the existing top tier of the existing two tier oligopoly, it does not level the playing field for the other smaller challenger banks to enable us to grow and even to compete and provide more choice to Kiwis,” McLean said.

The Government is taking the advice of the Commerce Commission which recommended making Kiwibank, NZ’s state-owned and fifth largest bank, a disruptive competitor. 

Finance Minister Nicola Willis wants to break up the “cosy pillow fight” between the big four Australian owned banks – ANZ, ASB, BNZ and Westpac – who control the bulk of NZ’s banking market. 

Willis announced in early December that Kiwibank had been instructed to reach out to NZ investors about a possible $500 million capital raise in order to help the bank “vigorously compete” against the big four Australian-owned banks. 

McLean said on Wednesday that small banks play an important part in NZ’s banking landscape but are constrained from competing effectively in the current regulatory environment. 

This is because the big four banks use the internal ratings-based (IRB) capital framework while the country’s other banks, including Kiwibank, use standardised risk weightings prescribed by the Reserve Bank.

Kiwibank, Heartland Bank and the Co-operative Bank made submissions to Wednesday’s parliamentary banking inquiry session and all the banks brought up concerns they had with the current regulatory capital settings.

Kiwibank CEO Steve Jurkovich described it as a “balancing act” while Heartland Bank chief executive Leanne Lazarus said changing capital settings offered the “biggest opportunity” not just for Heartland but other challenger banks as well.

Co-operative Bank chief executive Mark Wilkshire said access to capital was one of the top things that the Co-operative Bank saw as a barrier to growth.

“We do think probably our biggest concern is highlighted around the amount of capital you have to hold for the same asset class,” Wilkshire told the select committee, adding that it has had a “direct impact” on the bank’s pricing and ability to compete.

Levelling regulatory capital requirements between the big four banks and smaller banks was a recommendation the Commerce Commission made in its draft report on personal banking services in March earlier this year. Then Chairman John Small went as far as describing it as as the most important recommendation in that report.

However, when the Commission released its final report in August, it backed away from the recommendation, stating instead that the Reserve Bank should implement more granular standardised risk weightings instead of reviewing its prudential capital settings.  

SBS Bank’s Mclean said on Wednesday that more standardisation would align the capital risk rate requirements “across all banks”.

“Especially for loan types with similar characteristics such as home loans, irrespective of the lender who provides it, thereby helping to level the competitive playing field,” he said.

“...why are smaller banks required to carry as much capital as a larger bank when the consequences of a bigger bank failure would be exponentially more significant for New Zealand than would be the case for the smaller banks?”

Competition advocate and 2degrees founder Tex Edwards, who made a submission to the banking inquiry in November, also doesn’t believe that Kiwibank is the solution for NZ’s banking competition issues.