By Martien Lubberink*
I’ve just returned from this morning’s Finance and Expenditure Committee (FEC) session on the banking inquiry, the one where the top brass of the Reserve Bank of New Zealand were questioned about… well, that’s the thing. What exactly was the session about?
You wouldn’t know it from today’s discussion, but the FEC’s updated terms of reference were clear: the inquiry was launched to examine the state of competition in New Zealand’s banking sector. Specifically, it was to explore “excessive profitability compared to international peers, lack of competitive pressures, barriers to consumers changing providers, debanking of some legitimate sectors, interest rate disparities, and banks’ commitment to delivering adequate customer service in the likes of rural communities.”
And yet, somehow, the conversation has drifted, or more accurately, been driven, into a narrow focus on bank capital requirements. Conveniently so for the Big 4 banks, who have lobbied persistently for weaker capital standards, and who now stand to benefit materially from this shift. Because let’s not forget: less capital means higher leverage, and higher leverage means higher profits. (If you struggle with the discussion on bank capital, see the awesome crash course on bank capital at the bottom of this post.
So how did we get from there to here?
The answer, in part, is a lack of direction from the FEC Chair, who appears to have lost control of the process. What was meant to be an investigation into market dynamics has morphed into a technical debate about capital requirements, a shift that serves incumbent banks rather well. With the Reserve Bank’s leadership in flux, and the former Governor now largely absent from the scene (at least until the circumstances of his departure are fully understood), a vacuum has emerged.
The Big 4 have filled it with a narrative that suits their interests.
Even RBNZ Board Chair Neil Quigley seemed frustrated. “It has become a focal point in a way that may be unhelpful,” he said, referring to the overemphasis on capital.
Prudential standards matter, of course, but they are just one piece of the puzzle. And they’ve become a distraction from the real questions: market structure, barriers to entry, and how well the banking system serves New Zealanders across different communities.
I also share Quigley’s concern about how the discussion has been shaped by weak analysis and selective advocacy. Patrick Smellie captured a telling moment this morning: when National MP Dan Bidois cited submissions from Simon Jensen and Andrew Body arguing that capital requirements were “stalling growth,” Acting Governor Christian Hawkesby diplomatically questioned the quality of the evidence. Some of these claims have been thin, but they’ve nonetheless managed to dominate the agenda.
This is not just a technical policy dispute. Capital settings go to the heart of financial system resilience. They determine whether banks can absorb shocks, or whether those shocks are passed on to households and firms. Diluting these requirements under lobbying pressure is a risky trade-off. I wrote about that previously.
It’s also, undeniably, a win for the Big 4. With the inquiry’s focus now elsewhere, they are no longer under the same scrutiny for their profitability and dominant market share. Instead, they’ve shifted the conversation to one where they argue for room to grow.
We should all be concerned. The inquiry seems to have lost its compass, and the committee its coherence. If the FEC has abandoned its original intent to examine competition in banking, it might be time to say so plainly, rather than pretend that this detour was part of the plan.
*Martien Lubberink is an Associate Professor in the School of Accounting and Commercial Law at Victoria University. He has worked the the central bank of the Netherlands where he contributed to the development of new regulatory capital standards and regulatory capital disclosure standards for banks worldwide and for banks in Europe (Basel III and CRD IV respectively).
This article first ran here and is used with permission.
10 Comments
Thanks Martien. Is there anything this Government does for New Zealanders rather than its major donors?
This was always going to be the way though, as I said repeatedly prior to National being elected. The whole coalition is captured by special interest groups, mainly big business. They are basically taking orders from the big banks in this case, to focus on tiny details instead of the bigger picture.
Thanks for the article.
I think the conversation has morphed into one about capital ratios because everyone seems to have identified the issues of lack of competition and resulting very high profit margins but - and in spite of - a lot of talk -no one has put forward any plausible solutions.
Reducing the capital requirements with an expectation of reduced interest rates for borrowers, including farmers, is an easy band wagon to jump onto and one relatively easily understood.
Agree, probably because there are no "solutions". I have witnessed a number of businesses (rural and urban) rage against one of the big 4, move to a new finance option, often offshore, only to realise they out of the frypan into the fire. The reality often is the business dosnt work, or the people have a strange take on numbers and reality. Not saying the banks are perfect but just an observation.
"There are no solutions" Why not just constrain them on how much money they can print? Limit what they can lend out. They in many respects undermine the productivity of the economy, and any existing regulation is simply not achieving what is required. I don't believe that 'Capital Ratios' as currently defined is meeting this requirement.
I suggest it is the government who should be determining the level of 'money' that is circulating in the economy, not the private banks, or even the RBNZ. Deregulating the banks in the 80's was the government abrogating their responsibilities to their constituents. That needs to be fixed.
Good article.
But capital requirements, as we head into physical de-growth permanently, are going to be really really important. And eventually, not enough. Trace it through, and the whole banking system is parasitic - there is no reason we couldn't have set up a trading-proxy system ex interest/usury, and indeed many cultures have.
Which cultures?
Try a Google search for cultures against usury or Wikipedia for a detailed response. Google ai generated an immediate lengthy response for me to these search words.
"The Aussie Banks hate the RBNZ capital requirements. Why? It hits their bottom line. Less money for bonuses. Who's been lobbying for them to be relaxed? National's (unofficial) Economic Adviser, the NZ Initiative. Its former Senior Economist is the PM's (and Willis') Adviser. Don't forget how the former ANZ Chair is previous Nat Party PM, John Key, & subsequent ANZ Chairs flew with PM Luxon on trips to Japan and, in the form of Scott St John, to India."
My uniformed opinion is that the banking enquiry was from the start was a voter appeasement action to keep their current supporters onside, and not to change anything... just enough action to appear decisive and potent while preserving the status quo.
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