As the push for increased banking competition in New Zealand snowballs, exciting times for customers could be ahead.
More competition for their custom, new products and services, new ways those products and services are offered, better prices, and the ongoing advancement of technology, promise much.
With the public, regulators and government seemingly aligned on wanting this, it's going to be fascinating to see how it plays out.
We've had the Commerce Commission's market study make 14 recommendations to boost competition for personal banking services. We've had Finance Minister Nicola Willis immediately say the Government will act on all 14 recommendations. And now we've got the parliamentary banking inquiry underway, which is also focusing on rural and business banking.
Against this backdrop, the Reserve Bank, tasked with maintaining financial stability, is facing criticism. This includes from Willis for having settings that are too conservative and discourage competition. She plans to issue the Reserve Bank with a new Financial Policy Remit.
The Reserve Bank is now talking up proposals to make the regulatory burden more proportional, meaning smaller firms will have lower requirements. This includes reducing the minimum capital requirement for banks from $30 million to between $5 million and $10 million, and considering broadening the criteria for use of the term "bank."
As a long time advocate of more banking competition in NZ, it's an exciting time. That's even though a slightly disconcerting thought has crept into the back of my head.
It is that the brave new world we appear to be heading towards may also be one where we see failures of financial institutions. Whilst that's a sobering, and even frightening, suggestion, it's not a reason to maintain the status quo where the big four bank oligopoly reigns.
And nor is it a suggestion that any individual entities, or specific types of financial institutions, are going to fall over.
It's just a suggestion that, as market entry barriers are lowered and the likes of open banking enable newcomers and new services, we can expect to see an increase in the number of entities competing for our business. They may not all survive. Some of them may make mistakes. Some nefarious activity may emerge.
Sorry to be a party pooper. However, I'm old enough to remember the demise of the finance company sector between 2006 and 2012, detailed by interest.co.nz's once infamous deep freeze list here.
Overseas there've been some notable bank failures over the past couple of years. Silicon Valley Bank in the US, for example, and global behemoth Credit Suisse. Such events led to use of the term "digital bank run" due to concern, or panic, spreading via social media. Closer to home, three Aussie neo-banks - Volt, 86 400 and Xinja, surrendered banking licences issued to them by the Australian Prudential Regulation Authority.
Of course much has changed since the great NZ finance company meltdown. Despite the potential for a regulatory liberalisation, I expect oversight of our financial entities will remain better and stricter than it was back then.
Human history tends to suggest, however, that when risk increases, there may be casualties along the way. We're also in the era of cyber attacks, a war against financial scams, rising geopolitical tensions, and climate risk. These aren't insignificant threats for customers and their financial institutions alike.
For savers an important point to note is the depositor compensation scheme is due for implementation from mid-2025. It'll provide protection of up to $100,000 per eligible depositor, per licensed bank, building society, credit union and deposit taking finance company, in the event of deposit taker failure.
There are some potential fishhooks in the compensation scheme. That said, politicians tend to be aware that depositors are also voters. Especially large numbers of depositors. Thus there's a history of governments bailing out failed financial institutions, or at least their depositors. See South Canterbury Finance, for example.
In the brave new world that may be just around the corner, we might also see more mergers and acquisitions among financial institutions as they joust for customers, market power and potentially survival.
As we move towards a banking world of more choice, more competition, better service and hopefully better prices, there should be much to look forward to. Given this is an industry that's all about managing risk, some mis-steps may occur. Nonetheless here's to the rewards comfortably outweighing any downside.
*This article was first published in our email for paying subscribers first thing Friday morning. See here for more details and how to subscribe.
22 Comments
The Big Bank's aren't immune. If anything, they are more at risk because they have issued, and are held hostage to, most of our Debt. And it's that Debt; Lending, that is at the heart of any future problems.
"Bank of New Zealand says it had no intention of airbrushing the past by leaving its two giant government bailouts from its official online history.....BNZ, which had been government-owned since 1945, hit trouble again in the 1980s after the bank's expansion of corporate lending following deregulation of the banking sector. This resulted in a progressive government sell-down, an injection of $200m of taxpayer funds in 1990, and the sale in 1992 to National Australia Bank, which has owned it ever since."
https://www.stuff.co.nz/business/industries/64930274/bnz-inadvertently-…
And here's just one reason that Risk is mounting every day:
"Three sets of clients had come to him in the last few weeks saying they would have to sell up because they could see no other way out. One Christchurch couple in their mid-50s had signed with a bank for a 15-year loan term. This had been manageable when interest rates were set at 2%, but once they rose to almost 7% it was too much, and they couldn’t meet repayments. "
But, ah no. The clever mortgage broker had a solution - change banks, and extend-and-pretend:
"On paper it meant they would not pay off the house until they were 85 years old, but the reality was they would have downsized, paid it off as interest rates dropped or possibly inherited some money, he said." That's not Reality! It's Hope. And when all there is left is Hope, there is No Hope.
Relaxing bank lending ratios of any kind now is steering us towards future disaster.
https://www.oneroof.co.nz/news/s-we-cant-afford-this-homeowners-fear-th…
@ bw - Who on earth gets a 15year loan term? Certainly not the normal. This is a cherry picked article. Most people have either likely purchased a home by 50yo as these people have, or have conceded that they will remain tenants fo life. It is certainly not the normal having a 50yo taking out a mortgage, considering the average age to buy a home is 37 in this country. Divorce maybe the only likely exception to this rule.
As for the clever mortgage broker, good on them. When your bank says no you cant do it, you go to someone who can. This is proactive in not taking the first no one receives. We would still be renting like plenty of our peers if we just took the first no by a bank as gospel.
A 20% deposit on today's pricesnis ridiculous. Once someone saves 20% of today's prices & goes back to the lender, one will likely recieve a no still, as today's prices have moved. You cannot have 20% of yesterday's prices, & property prices tend to rise further for longer than they fall in this country. When prices fall, heavy restrictions on lending mean those people are still unlikely to be able to purchase, even with falling property prices. You do not get both easy lending, low interest rates & falling property prices, you get either one or the other. When property prices are falling, interest rates are high, lending is low.
You learn to do what you can with what you have, and with whom can help make it happen for you. Relaxing bank lending is exactly what requires to happen, and quick about it too.
@ Meh - "A 15 year mortgage might have been normal 50 years ago".
As would slavery, segregation & banning gay marriages have also been normal 50 years ago too.
Do all traditions from 50 years ago stick around? Or do we accept that what was considered normal 50 years ago, was 50 years ago, and may not be considered normal today? 50 years ago we only had two genders, now apparantly there are hundreds, and new ones being discovered everyday. Imagine what medical procedures were considered normal 50 years ago, & if our medical industry had not progressed since. 50 years ago basic biology was considered normal, now it's considered outdated.
GoWokeGobroke : "Who on earth gets a 15year loan term? Certainly not the normal."
That one had me laughing out loud. You have much to learn grasshopper.
@ Chrisofnofame - Can you clarify what you believe I have "yet to learn" from your very limited understanding of my position?
From my personal observation of you, from what little I know of you, you seem to think it is the job of other people to financially assist you into a home, you seem to think that we can all tax ourselves to financial prosperity, & you believe that Ardern & co did a fantastic job. What possibly could I learn from you that would be in any way both realistic, & beneficial? Perhaps it is you that still has a great a deal from others, grasshopper. Too busy with all the answers & complaints, no time to share your success stories of how you put all your answers to action. Would love to hear some sometime.
Did many of your peers actually choose 15 year mortgages? Could they even afford such? I'm glad I can make you laugh, but I don't understand what is so funny about a 15 year mortgage. Is this an old timer thing? I've never ever heard of any first time buyer be pre approved for a 15 year mortgage, for the repayments would be astronomical. If you believe i have missed something, by all means clarify.
@ Chrisofnofame - The data is out there? What data are you even talking about?
He who makes the claim, bears the burden of proof. You have no proof, you have no data. The truth doesn't mind being questioned, a lie does not like being challenged. You Chris do not like being challenged. It is clear because you do not have "the data" you speak of. You expect others to do your homework for you, then scream mis information if it doesn't fit your narrative.
"Why aren’t the likes of SBS or TSB growing massively?"
It's very easy to grow the loan book. Look at the likes of Countrywide Financial, Ameriquest, Washington Mutual, Wachovia in the US.
People are free to choose, however people are not free to choose the consequences of their choice.
Id like too see banks offer full services at the branches they have open on Saturdays for folk that work weekdays .... probably too much to ask I guess. $100k deposit cover is weak and clearly designed to get folk to move money around (spread risk) . Why not scale fees for higher cover? Surely banks will want to hold onto their more liquid clients than see money shifted just to get cover?
What have I just read?
"Brave new world"? "More competition for their custom, new products and services, new ways those products and services are offered, better prices, and the ongoing advancement of technology, promise much."
The banks can't provide the basic products and services they were built on. Nothing they or "the market" does is for the benefit of the customer. We have devolved to the point where the people are serving the Market.
Why is it frightening that financial institutions might fail? Are they not allowed to? Have we actually addressed why the finance sector industry failed in the first place?
As for the M&A scenario, this has already been happening for the past 40 years. It's why competition and productivity is also a failure over this time period.
There's no doubt that open banking will create a plethora of new risks.
But not so much at the macro level as many believe, e.g. financial institution collapses. The biggest risks - by far - will come at the micro level as banking staff and financial system users are unlikely to be fully aware of how data can be accumulated and/or used by the unscrupulous.
It's going to fun. But it won't be without significant pain and additional cost.
A Risk to the need for perpetual Debt creation, what Risk?
"Once upon a time, property was just a place to live. Now for many, bricks-and-mortar investing is closer to a national pastime – an asset class viewed as something between a retirement plan and a ticket to instant wealth. Real estate investment has increased steadily over the past few decades, quadrupling from just 5 per cent of taxpayers in 1980 to 21 per cent by 2014.... But if you look closely, landlord numbers are declining..... Australia has passed peak property investor" (AFR. Today)
@ bw - Your right, Real estate investment has increased steadily over the past few decades.
Banks don't lend money or co invest in any other form of investment other than property. You would be laughed out of the bank if you asked to borrow a million dollars towards crypto currency or foreign exchange trading. That's not an investors fault, that's the banks financial appetite that investors are simply tuning to. If that's a problem for you, take it up with your local bank. I'm sure they'd love to hear from an intelligent guy like you why a banks financial appetite in lending should be directed elsewhere other than real estate. Hey, if you can convince them, more power to you.
Until then, investors will invest where they have the best leverage. One does not have much leverage using ones after taxed earned income from a job. I'm sure you know the stats already on saving ones self to wealthy. Shift banks lending appetite & you will shift an investors leverage options.
You pitch property investing like it is illegal, it is not. You pitch that property was just a place to live, it still is. Investors provide homes for those that cannot provide for themselves. If they could provide for themselves there would be no need for investors. It's not an investors job to heavily subsidize a tenant with cheap rent so they have an easier ride to ownership. That's a tenants job to take their earned income & turn it into something useful. They fail to do so, they pay a high price to an investor for life to do it for them.
What you confuse yourself with is the difference between shelter as a basic human right, & home ownership. The two are totally different. The right to strive towards home ownership has always remained. Shelter is a basic human right, & is provided by others for a fee. Shelter has never been free. It's costs in either a mortgage for 30 years or rent for life. Those have always been the only two choices available.
Negative risk means negative progress - if NZ Inc is to survive we need to fund business growth and move away from residential investment. For investors it just means being more sensible with investment, the people who had all their eggs in the GFC finance company basket really only had themselves to blame if they lost everything
@ kensinma69 - "For investors it just means being more sensible with investment".
Being sensible with investment is not using ones little hard earnt after tax dollars to invest small. Being sensible with investment is having the ability to use "other people's money", in this case the banks, in order to invest larger sums into investments. Banks currently do not have a financial lending appetite to lend on most other investments other than a business - which as you pointed out with the GFC carries its own risks during financial crisis, & real estate, which regardless of the economy outlooks, everyone requires a roof over their head. At this stage, there is no other viable investment option that is sensible to make any decent returns from, that doesn't require huge amounts of one's hard earnt after tax dollars saved up & thrown into the ring.
Change a banks pending apatite, you can encourage more investors to invest elsewhere. Currently this is not a viable option.
@ Meh - That's not what I said. Re read it again.
I have said using "other people's money", in this case using the banks money to invest, rather than what little hard earned after tax dollars one has after bills come out that can make one far wealthier. I'm sure I don't need to remind you of the stats on those that think they can save themselves to wealthy. It's not a reciepe for success at all. Leverage is the key. There is little leverage in one's hard earned after taxed pay once bills come out.
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