Federated Farmers is backing the finance minister’s shot across the bows of the Reserve Bank warning it to do more to encourage competition between banks or risk facing legislation requiring it to.
Nicola Willis was responding to a recent Commerce Commission market study when she likened competition between the major banks to a “cosy pillow fight”.
The study found the industry operates as a “two-tier oligopoly”, with no significant competitive threat to the biggest banks having emerged since state-owned Kiwibank was established more than two decades ago.
As a result, the returns for bank shareholders were in the upper quartile globally between 2010 and 2021, were even higher for the owners of the largest banks and were excessive given the high proportion of low-risk lending in New Zealand.
Willis said the government intends to act on all 14 of the Commerce Commission’s recommendations, including taking advice on how to provide new capital for Kiwibank to increase its market share.
She said she would also write to the Reserve Bank urging it to take competition into account in its decisions as overseer of the stability of the financial system.
Willis said she agreed with the Commerce Commission that rules for calculating the capital that smaller lenders must hold against their loan books is stifling competition.
She said she does not rule out legislating to force the Reserve Bank to do more to increase competition if it does not heed new guidance issued by her.
Willis said she accepted there is a trade-off between increasing competition by relaxing bank capital requirements, and financial stability, but said the pendulum has swung too far towards guarding against bank failures.
“What the OECD and others have said … is that our Reserve Bank is particularly conservative.
“And that is partly because of the guidelines government has given it and we have to look at those guidelines and understand how that might alter its decision-making.”
Federated Farmers national board member Richard McIntyre said while the Commerce Commission market study focused on personal banking, many of the same factors are relevant to the rural lending market, which will be the focus of upcoming parliamentary inquiries.
“But we were even more encouraged by Nicola Willis’s comments.
“It shows she gets the issues and is going to do something about it.”
McIntyre said he was particularly encouraged by Willis’s comments about Reserve Bank requirements for bank capital stifling competition in the banking sector.
“I am delighted when businesses make a profit and the more the better provided it is through running an efficient business, but if it is due to a lack of competition or price gouging then I have an issue with it.”
McIntyre expects the upcoming inquiries by Parliament’s Finance and Expenditure and Primary Production select committees will test Federated Farmers’ claim that the amounts of capital the Reserve Bank requires the banks to hold to back their rural loans is excessive.
“It is equivalent to your own insurance right?
“You can insure absolutely everything you own at zero excess and for the full replacement value but no one does because it is uneconomic to do so.”
McIntyre said Reserve Bank officials have estimated the cost in higher rural interest rates from the most recent increases in capital requirements to be between $320 million and $720m a year.
“As a nation and a rural sector we could be doing far greater things with that money.”
However, banking academic Claire Matthews of Massey University said the minimum capital requirements for different classes of lending are set by global banking regulators and are “not just something the Reserve Bank has come up with by sticking their finger in the air”.
While it is true the Reserve Bank went further in its 2019 capital review, it only did so because in its expert judgment that extra capital was what it would take to avoid costly bank failures in NZ conditions.
For the government to second-guess that judgment risks undermining the independence of the central bank.
“I have a sense of unease that the government is looking to get themselves so involved in the banking sector because it is popular and that is not a good reason to be doing it fundamentally.”