The Labour Government’s decision to direct the Commerce Commission to investigate the retail banking sector may be politically motivated, but that doesn’t mean it’s a bad idea.
New Zealand’s banks have been fairly profitable for decades and it’s not a coincidence the extra scrutiny comes as voters are fretting about high interest rates.
When mortgage rates come up on the campaign trail, Labour can redirect the conversation towards competition in the banking sector. Even though that’s not the reason rates are high.
But just because the timing has a political aspect doesn’t mean there isn’t merit in the investigation. In a democracy, it can be difficult to separate populism from representation.
Households are struggling with high interest rates and have every right to expect the Government to make sure banks aren’t taking advantage of them.
The Reserve Bank (RBNZ), which is the prudential banking regulator, called attention to the profits of retail banks in its May financial stability report.
“The differences in risk-adjusted profitability may reflect a lack of competition. However, several other drivers are possible,” it said.
Other options include cost efficiency due to economies of scale, differences in the tax treatment of returns to shareholders in New Zealand and Australia, and not doing high cost, risky operations such as investment banking.
Profitable, but in a good way
The RBNZ wasn’t shy about saying profitable banks are good banks, at least from a financial stability perspective.
“A profitable banking system is beneficial for financial stability, as it enables banks to generate or attract the capital base needed to absorb potential losses over economic cycles.
At the same time, competition between banks has an important role in supporting an efficient, inclusive, and dynamic financial system,” it said.
Opposition leader Christopher Luxon supports the market study, while also being frustrated that Labour blocked a Parliamentary inquiry in favour of an election year market study.
It's not clear whether that is because he thinks the sector needs scrutiny, or just not wanting to be cast in the role of ‘Big Bank guy’, but it shows broad public support for the study.
In comments to the media, National has been careful to talk about how regulations have added costs for consumers and even imply they could be blocking entrants.
David Cunningham, chief executive of Squirrel, said regulation and legislation made it hard for challenger banks to succeed and pushed the big banks into a “sea of sameness”.
“Although the Reserve Bank has an important role in ensuring the stability of the financial system, it’s also one of the greatest culprits behind the lack of competition in banking”.
HSBC’s recent decision to leave the NZ market was likely due to an RBNZ consultation paper which proposed restricting foreign bank branches from doing retail banking, he said. (HSBC said otherwise).
Regulation barriers
It was only two years ago that Westpac New Zealand was threatening to leave the market after the RBNZ increased the capital requirements on Australian banks and strengthened its outsourcing policy.
The bank was unhappy about the increased regulatory burden and was considering a sale.
When it ultimately backed down, one equity analyst said this was the right decision as mid double-digit returns on equity made NZ a good place to bank.
That’s a better return than banks earn in other markets.
The RBNZ said the average for the big four banks was 15.3% across the five years ended 2022, compared with 7.4% for small local banks and 11.3% for large banks in similar countries.
The same four banks that made a 15.3% return in NZ, only make 12.9% in Australia.
Readers, media, and politicians should remember that these are big businesses with huge amounts of capital, so their nominal profits are also very large numbers — $7.18 billion last year, to be specific.
But nominal profits can bounce around year-to-year as accounting practices, such as setting aside money for expected losses or interest rate hedges, impact reported earnings.
The New Zealand Banking Association said local banks were resilient because they were highly regulated, well capitalised, and profitable.
A market study will at least shine a light on whether that profitability can be justified.
18 Comments
The government could easily save the millions they will waste on this 'market study'.
However they will never admit that they are actually the ones who pumped up the banks profits in no small part with their fear driven paradigm around the possible impacts of a major bank collapse.
BNZ went under in the early 90's and the economy survived - although we lost the entire value we had in BNZ after it was sold to NAB for $600M which was the exact same amount the government had propped up BNZs balance sheet by in the 2 years before the 'sale'. It was sold just before the economy recovered.
RBNZ are complicit in the banks profitability of late due to their ridiculously low priced "funding for lending" facilities they showered the banks with in the name of creating 'stability'...
The Reserve Bank (RBNZ), which is the prudential banking regulator, called attention to the profits of retail banks in its May financial stability report.
RBNZ run by bankers for the benefit of their former employers, Banks, go figure...
Good grief. Look I hate commercial banks profiteering - but there is something we all need to understand.
If the banks have collectively created around $600bn (net) to help people and businesses bid up the price of property, then they are going to have a similar amount of $ sat in deposit accounts (because loans create deposits). Remember that customer deposits are bank's liabilities.
So, given the level of these liabilities (around $600bn), banks need a proportionate amount of equity / capital on the table. In fact RBNZ requires them to have around 10%.
Now, if an investor is going to put their money on the table, they will want a return of, say, 12% (current bank return on equity average).
So, $600bn total loans x 10% required capital x 12% return for investors = $7.2bn profits after tax... which is almost exactly right.
We will only get bank profits down if we change the variables in the equation above. So, which one will it be?
Is it only 600 billions in mortgages??
$600bn total loans x 10% required capital x 12% return for investors = $7.2bn
And how does the interest rate margin comes into equation? They pay less for created deposits and charge more for mortgage as the rate of credit growth slowed down.
Or the Govt could simply read the 2019 report of Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry
"In responding to the issue of 'why', the Commissioner determined that:[103]
.....the answer seem(ed) to be greed – the pursuit of short term profit at the expense of basic standards of honesty..... From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales..... When misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done."
The same banks.
https://en.m.wikipedia.org/wiki/Royal_Commission_into_Misconduct_in_the…
Last night when the news talked about this, the question was "Are Kiwis getting a fair deal?". The banks response dodged the question by responding there was plenty of competition with 16 private banks in the market. Of course there is, but that still doesn't mean Kiwis are getting a fair deal, as all the banks operate the same way.
Sam Stubbs from Simplicity identified that the banks threaten to pull out if they are regulated too heavily. Ever heard of a bank called Kiwi Bank? That one won't pull out. For the other banks, just say bye bye, and leave your depositors funds behind.
as all the banks operate the same way.
The question begs as to whether they would be likely to act very different from one another, as they're all governed by the same framework.
Most commerce is now delivered in a state regulated way, and the degree of variance between players in an industry is becoming increasingly marginal. Not much room for innovation, anyway.
If they wanted political gain they should've timed it for the study to be done, get measures implemented and give some time for the measures to be felt by the population by the time of elections. Probably that's exactly what they want for the next election cycle
Also, if only they had the power to condition FLP to lending to businesses instead of throwing a pile of cash on a Monopoly board
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