The Times Australia
The Times World News

.
Men's Weekly

.

ComCom diagnoses the problem with NZ’s banking industry – but will its solutions offer a real fix?

  • Written by Martien Lubberink, Associate Professor of Economics, Te Herenga Waka — Victoria University of Wellington
ComCom diagnoses the problem with NZ’s banking industry – but will its solutions offer a real fix?

The New Zealand Commerce Commission recently released a draft report[1] on the state of personal banking services in New Zealand. Unsurprisingly, the market study found a marked lack of competition among the largest financial institutions in Aotearoa New Zealand.

But will the government bailout of Kiwibank in 2022[2] or the arrival of fintechs[3] make any long-term difference? If the commission’s report is to be believed – probably not.

The four major banks (ANZ, ASB, BNZ and Westpac) own almost 90% of the assets of all banks in New Zealand. Kiwibank, founded in 2001 to be an industry disrupter[4], has not been able to consistently impose competitive pressure.

In reality, smaller banks and fintechs are limited by the structural advantage of big banks, the burden of regulation and compliance and difficulties on the customer side with switching providers.

The commission offers some solutions to New Zealand’s banking woes. But regulators need to ensure any course correction doesn’t expose customers to the instability seen in Spain and elsewhere.

Diagnosing the problem in NZ’s banking system

The commission deserves praise for releasing the draft report, which effectively highlights the lack of competition in New Zealand’s banking system. This deficiency has led to a lack of investment, innovation, and disruption, along with minimal customer switching.

A two-tier banking system has emerged, with the four big Australian-owned banks enjoying significantly higher profits and smaller banks lagging behind.

While diagnosing the problem is one thing, finding the right solution is another challenge. The report makes it clear there is no easy fix for the competition issues in New Zealand’s banking sector.

Read more: Credit Suisse is an anomaly: why Australia and New Zealand are safe from 'bank run' contagion[5]

A key reason for limited competition is the large size gap between the “big four” banks (ANZ, ASB, BNZ, Westpac), with combined assets of NZ$580 billion, and the smaller banks (Co-operative Bank, Heartland Bank, SBS, TSB), whose combined assets are $25 billion. This is a 24-fold difference. Let that sink in.

This vast size difference offers the big four banks important advantages, such as wholesale funding at lower cost. Moreover, fixed costs in banking are significant. They include the cost of ever-increasing regulation, systems, cybersecurity and the policing of money laundering. Against the backdrop of these high fixed costs, size provides significant economies of scale.

Large banks can also diversify more easily. If risks in the New Zealand banking system increase, large banks can spread their risks across the world. This measure is more onerous for banks with a domestic focus.

Size matters

Another problem is small banks with a domestic focus are, in practice, beholden to politicians, who may interfere with these banks for electoral reasons. In the aftermath of the commission’s report, New Zealand’s minister of finance Nicola Willis indicated[6] a willingness to look into how the government could better capitalise Kiwibank.

Unfortunately, the benefits of size are difficult to undo: size matters in banking. A country like Spain has shown how small banks can pose a significant risk[7] to financial stability.

The commission appears to recognise the benefits of size. Its report does not propose to break up the big banks. Instead, it recommends helping smaller banks, such as Kiwibank, by softening the burden of regulation (through the Proportionality Framework[8], for example), improving access to capital and lowering the weight given to certain risks.

Nicola Willis in front of media microphones
Finance minister Nicola Willis has said she is willing to consider how the government could better capitalise Kiwibank. Hagen Hopkins/Getty Images[9]

Intervention poses risks

But the proposals to help smaller banks, no matter how well-intended, are concerning. These initiatives are reminiscent of the pre-global financial crisis (GFC) era when lower capital ratios were used to boost competition and extend excessive credit to aspiring home-owners.

Regulators in the years leading up to the GFC trusted principles-based regulation only to discover in 2008 such regulations were gamed at the expense of the most vulnerable of our society. And yet the term “principles-based” appeared on page 180 of the commission’s report. Almost as if little has been learnt since the GFC.

Equally concerning is the report’s trust in Kiwibank, the bank stuck in the middle between the big four and the smaller banks.

With a return on equity well below its cost of capital, the bank has shown lacklustre performance for some time now. Among the 10 largest banks in New Zealand, Kiwibank also has the second lowest common equity tier 1 capital ratio[10]. This means the bank is vulnerable to shocks and may struggle to meet the increasing capital requirements going forward.

Infusing billions of dollars in the hope and expectation of turning the bank into a disrupter is playing with fire. Disruption implies an elevated risk that ultimately can affect the stability of the banking system.

Read more: Why now would be a good time for the Reserve Bank of New Zealand to publish stress test results for individual banks[11]

Likewise, the idea aired by some to float 49% of Kiwibank’s shares is concerning, as it introduces a moral hazard problem: Kiwibank’s managers may take excessive risks, expecting the Crown to provide more capital. Floating shares also creates uncertainty among the new shareholders: at some time a government may regret the float and nationalise the bank, again.

Trying to help weaker banks through deregulation, infusing new capital, or lowering capital requirements may backfire. The commission should instead continue to promote an inclusive banking system that is modern and up-to-date and serves all of us well.

The proposals regarding real-time transfers, ease of switching, market transparency, open banking, fintech, consumer empowerment and any other initiative to improve the customer experience are definitively worth pursuing.

Our banking system is such that consumers will likely bear high costs for some years to come, but all those in our financial system should at least aim for one which is safe and enjoyable to use.

Read more https://theconversation.com/comcom-diagnoses-the-problem-with-nzs-banking-industry-but-will-its-solutions-offer-a-real-fix-226952

Times Magazine

From Beach Bops to Alpine Anthems: Your Sonos Survival Guide for a Long Weekend Escape

Alright, fellow adventurers and relaxation enthusiasts! So, you've packed your bags, charged your devices, and mentally prepared for that glorious King's Birthday long weekend. But hold on, are you really ready? Because a true long weekend warrior kn...

Effective Commercial Pest Control Solutions for a Safer Workplace

Keeping a workplace clean, safe, and free from pests is essential for maintaining productivity, protecting employee health, and upholding a company's reputation. Pests pose health risks, can cause structural damage, and can lead to serious legal an...

The Science Behind Reverse Osmosis and Why It Matters

What is reverse osmosis? Reverse osmosis (RO) is a water purification process that removes contaminants by forcing water through a semi-permeable membrane. This membrane allows only water molecules to pass through while blocking impurities such as...

Foodbank Queensland celebrates local hero for National Volunteer Week

Stephen Carey is a bit bananas.   He splits his time between his insurance broker business, caring for his young family, and volunteering for Foodbank Queensland one day a week. He’s even run the Bridge to Brisbane in a banana suit to raise mon...

Senior of the Year Nominations Open

The Allan Labor Government is encouraging all Victorians to recognise the valuable contributions of older members of our community by nominating them for the 2025 Victorian Senior of the Year Awards.  Minister for Ageing Ingrid Stitt today annou...

CNC Machining Meets Stage Design - Black Swan State Theatre Company & Tommotek

When artistry meets precision engineering, incredible things happen. That’s exactly what unfolded when Tommotek worked alongside the Black Swan State Theatre Company on several of their innovative stage productions. With tight deadlines and intrica...

The Times Features

Running Across Australia: What Really Holds the Body Together?

How William Goodge’s 3,800km run reveals the connection between movement, mindset, and mental resilience As a business owner, I’ve come to realise that the biggest wins rarely com...

Telehealth is Transforming Healthcare Services in Australia

It has traditionally not been easy to access timely healthcare in Australia, particularly for people who live in remote areas. Many of them spend hours on the road just to see a...

Launchd Acquires Huume, Strengthening Creative Firepower Across Talent-Led Marketing

Launchd, a leader in talent, technology and brand partnerships, has announced its acquisition of influencer talent management agency Huume from IZEA. The move comes as the medi...

Vietnam's "Gold Coast" Emerges as Extraordinary Investment Frontier and Australian Inspired Way of Life

$2 Billion super-city in Vung Tau set to replicate Australia's Gold Coast success story A culturally metamorphic development aptly named "Gold Coast" is set to reshape Vietna...

Choosing the Wrong Agent Is the #1 Regret Among Aussie Property Sellers

Selling your home is often one of the largest financial transactions you’ll make, and for many Australians, it’s also one of the most emotional. A new survey of Australian home se...

Travel Insurance for Families: What Does it Cover and Why it’s Essential

Planning a family trip is exciting, but unexpected mishaps can turn your dream vacation into a stressful ordeal. That’s where travel insurance comes in—it’s your safety net when ...