The chief executives of the four big banks will be asked to reappear before Parliament’s inquiry for focused 90-minute hearings

Parliament’s Finance and Expenditure Committee has decided to recall the leadership of the four largest banks for a second round of inquiry hearings, this time for 90 minutes with a structured agenda. 

The decision comes after hearing submissions from banking reform activists on Wednesday, who told the committee banks were earning up to $10 million a day in excess profits and creating a $6 billion to $10 billion drag on the annual economy.

In a statement, committee chair Cameron Brewer said having the bank leadership back for another set of hearings would allow members to scrutinise specific issues that have been raised during the inquiry. 

This could include excessive profitability, competition pressures, debanking, and service in rural communities. A structured agenda will be created prior to the hearings and banks will also be asked to answer about 50 questions in writing before appearing.

Barbara Edmonds, the senior Labour MP on the committee, said another set of hearings were needed because government members botched their attempts at questioning. 

“The previous focus on chief executive pay and benefits—instead of economic rents, climate reporting obligations, and how banks price for small business and farm lending versus residential housing—is proving this inquiry to be a waste of time, when the government should just act on the Commerce Commission's report,” she said. 

Go hard, or go home

Kent Duston, an economic consultant and convenor of The Banking Reform Coalition, said on Wednesday that the Commission's recommendations should all be implemented, but they were not sufficient to deliver structural reform. 

Additionally, Payments NZ should be shifted away from bank ownership into an independent entity and the banks should be split into retail and wholesale businesses. These are both fairly radical proposals which were not included in the Commission's report. 

Separating banks could create a structure like in Germany, where local savings banks focus on consumer and business lending but don’t raise funds from global markets. Instead, regional wholesale banks secure capital and provide funding to support their lending.

Sam Stubbs, the chief executive of Simplicity which competes with the banks in KiwiSaver, agreed that Payments NZ needed much more supervision if it were to stay under bank control. It was currently too incentivised to protect the interests of its funders, which are mostly the big banks.

Both Stubbs and Duston agreed the Reserve Bank’s capital requirements were too strict and needed to be relaxed to enable competition and more business lending. 

Duston said the risk-adverse regulation had entrenched profitability, incentivised home lending over everything else, and dug a deep moat around big banks. This had made them “fat, dumb, and lazy”. 

“In theory, the risk-return based on the actual risk profile of banks is 5.5%, they are typically making between 11% and 12%, so they are twice as profitable as they should be,” he said. 

“The big four banks are producing about $7 billion of profit, and roughly half, $3.5 billion of it is unjustified. In other words, it is not being earned by a fair rate of return in the market; it is being earned by abuse of market power”.

Deadweight drag

He said unearned profits, pay wave fees and the ability for businesses to access capital, were a serious burden on New Zealand’s growth. 

“These things are essentially the sand in the gears of our economy. By our independent calculations, they inflict somewhere between another $6 billion to $10 billion in deadweight drag effects through the economy”. 

Stubbs agreed the banks were slow and unwilling to innovate, as demonstrated by incredibly slow progress in getting open banking operational. 

Over the past decade, he has had many fintech startups approach him for capital saying they only need the banks to do XYZ and then they can be a disruptor. But the banks never let it happen, and why would they? None of that wave of startups still exist today, he said.

Stubbs also told the committee not to listen to threats or fear-mongering from the big banks who will oppose any meaningful reform that might threaten their excess profits. 

Banks were trading on fear, by saying the sector needs big profits to maintain stability, and on threats, when suggesting capital will flee the country if returns dip below current levels. 

On Thursday, ASB chief executive Vittoria Shortt told Interest.co.nz that international investors could be scared off by an excess profit tax or NZ First’s “Woke Bank” Bill. 

"I think the important thing for me is what signal is the New Zealand Government sending around windfall tax? Again ... at a time when New Zealand really needs international investors, you know, what signal is this going to send?"

Stubbs said he opposed a windfall tax as it wouldn’t do anything to improve competition and the cost would eventually flow through to consumers. But the Australian banks would keep operating in New Zealand, as it would still be more profitable than their other markets.