Finance Minister Nicola Willis has told the Reserve Bank of New Zealand (RBNZ) to use its regulatory powers to encourage more banking competition, saying that if it fails to do so, the government will consider legislative changes. A rewrite of the RBNZ’s financial policy remit is about to begin.
The new remit will make it clear the Bank “needs to not only sustain competition, but actually promote more competition and to effect that through its prudential and regulatory settings,” Willis told the Institute of Finance Professionals NZ conference in Auckland on Oct. 15.
“You’ll have seen that our government is taking up the recommendations of the recent Commerce Commission inquiry into banking competition.
“We are concerned that the two-tier oligopoly has meant Kiwis are missing out on the competitive pricing and services they deserve from their banks. International experience shows that competition is one of the most important drivers of long-term growth and productivity.
“I’ve been consistent in saying if changing the financial policy remit is not sufficient, then we would be prepared to make amendments to both the Deposit Takers Act and the Reserve Bank Act,” she said.
The Commerce Commission undertook a 14-month-long study into the banking sector. It found that New Zealand’s four largest banks—ANZ, ASB, BNZ, and Westpac, which are all Australian-owned—do not face strong competition.
The Commission made a suite of recommendations aimed at supporting new entry and expansion, reducing regulatory barriers to competition, and empowering consumers to get better prices and services.
It described the market as “two-tier,” with the major banks in a stable oligopoly in the first tier and smaller providers in the second tier.
The government-owned Kiwibank currently sits between the two tiers while the four overseas-owned banks hold 85 to 90 percent of the assets of all registered banks in New Zealand.
Nor do the central banks always compete against one another.
“There have been times of relatively intense competition and other times where some or all of the major banks pull back, choosing to put more focus on maintaining profit margins than competing harder to gain market share,” the Commission said.
“We have not observed an ongoing struggle—with competitors constantly trying to ‘injure’ each other by taking sales away from their rivals—as we would expect in strongly competitive markets.”
Willis said the government aims to increase competition and the number of new entrants without overly advantaging the major incumbents.
As part of that strategy, she has also asked the Treasury to engage with Kiwibank on options for raising new capital to enable it to be “a more disruptive competitor for the big four banks.”
Potential sources of investment include KiwiSaver funds, New Zealand investment funds and “everyday New Zealanders.” She will take proposals to Cabinet later this year.
The Commerce Commission found that Kiwibank lacked “the scale and capital backing to consistently drive stronger competition.”
“There is currently no maverick—a particularly aggressive or innovative provider—disrupting the major banks,” it said.
At the same conference, RBNZ Deputy Governor Christian Hawkesby praised the minister for allowing it to continue working on the issue.
“It’s great that she’s not going straight to legislative change,” he said.
“It gives us a chance to illustrate that we can take into account competition, efficiency, and inclusion and that it can be done under the legislative framework that we have at the moment.”
He said the current legislative structure under which the RBNZ operates was only recently adopted and needs time to settle in.
He said the RBNZ is looking at ways to tailor regulations to smaller players and is consulting on how to make things easier for new entrants—for example, by adopting lower minimum capital requirements to become a bank and reviewing who is entitled to use the word “bank.”
“There’ll be some things that we don’t have direct control over, but we can be part of that conversation. We can have the ability to draw the industry together [but] there are other players who really need to take a lead in these areas as well.”
While large operations inevitably enjoy economies of scale that competitors can’t match, Hawkesby said the move to open banking will encourage the major banks to compete with each other more.
Open banking allows customers to share their financial data with different providers, making switching easier.
