Have your say: Inquiry finds banks guilty; Suggests more capital for Kiwibank, enhanced monetary policy

A report on the banking inquiry carried out by Labour, the Greens and the Progressive party into interest margins of New Zealand's Australian-owned banks has been released. The inquiry was set up following concerns that cuts in the Official Cash Rate (OCR), which fell from 8.25% in June last year to 2.5% in April (and has been there since), were not fully passed on to short term lending rates by the banks. In its findings, the report says there seems to have been a clear move by the banks to increase margins between their borrowing costs and short term interest rates charged to customers, although there was "mixed evidence regarding the reasons for this". It also makes a number of recommendations for future policy which include requiring the Reserve Bank to publish regular statistics on the cost of the banks' overseas borrowing, and increasing capital funding of Kiwibank in order to promote more competition between the banks. It also recommends that "further work be undertaken to explore an enhanced monetary policy framework which considers ways of achieving effective control of credit expansion and explores options for achieving a more stable and competitive exchange rate". The full report is reproduced below.

"A number of cost factors impacting on the banks have moved in different directions from OCR changes," the report said. "Further, overseas borrowing costs are now a very significant factor (although the total proportion of offshore financing appears to have peaked). In this area the information about what is actually happening to bank costs is very opaque. However, even after allowing for legitimate interest cost increases faced by the banks which do not reflect in OCR changes, there still seem to have been a clear move to increase margins between the borrowing costs of the banks and short (term) interest rates charged to customers," it said. "For most bank customers a more competitive interest rate structure with lower margins between borrowing and lending rates would clearly be an advantage. However, this does not seem to be something which can be currently achieved by changes in Reserve Bank policies. The Reserve Bank has made clear statements in this area but the major banks have chosen not to respond. Rather, it is an area where a more competitive institutional structure could assist. One option suggested to the Inquiry in several submissions was for government to expand the capital base of Kiwibank in order to promote a more active competition amongst banks." Here is the report. We welcome your insights and comments. Report of the Parliamentary Banking Inquiry