Banking competition comes with snags

Reining in heft of Australian banks could have catches

The optimists among us are hopeful the Commerce Commission’s study into the banking sector will eventually improve competition and lower the cost of services for consumers.

The pinch is that achieving this will come at a cost, and potentially create a battle between the competition watchdog and banks’ prudential regulator — the Reserve Bank.

The fixes the Commerce Commission recommended in its draft report on the sector, released last month, suggest a bunch of tradeoffs need to be made to weaken the dominance of the big four Australianowned

banks. Its key recommendations include: changing the rules around how much capital banks need to hold to even the playing field between the big and small players, increasing Kiwibank’s access to capital to enable it to grow, and requiring banks to share their data with third parties — a process known as open banking.

The issue the Reserve Bank and Government will face, if they follow the recommendations, is they come with some downside risk.

Let’s look at the first point, which commission chairman John Small believes is the most salient — getting the Reserve Bank to change its bank capital rules, aimed at preventing banks from collapsing.

Bank capital rules

Banks and the Reserve Bank quite publicly went to war when consultation on updating the rules began in 2017.

The sector argued the Reserve Bank was overdoing it, requiring them to fork out billions to withstand an Armageddon-level crisis. The Reserve Bank dug its heels in and is still overseeing the phasing in of its tougher rules, which will fully take effect in 2028.

The Reserve Bank last month told the Herald it didn’t plan to change its capital rules.

Reserve Bank governor Adrian Orr stood up to powerful bank chief executives. It’s unlikely he’s going to kowtow to the Commerce Commission.

One might argue it makes sense to let the bank capital issue be — if not in the name of making the financial system more resilient, then for the sake of sticking to the plan that’s finally in motion.

However, there might be a chance of the Reserve Bank bending on a financial stability issue that isn’t yet set in stone — the design of its deposit compensation scheme.

Deposit insurance scheme

The scheme, set to go live next year, will see deposit-takers pay levies into a Government-backed fund that would be used to reimburse depositors up to $100,000, should their deposit-taker collapse.

Small banks and non-bank deposit-takers are worried the Reserve Bank wants to charge them proportionately higher levies to reflect the fact they’re at higher risk of running into trouble.

The commission is cognisant of this.

But it’s also aware of the point the Reserve Bank raises — the small deposit-takers have the most to gain from the scheme, as it’ll give people the confidence to put their savings with institutions that might otherwise have deemed too risky.

The irony here is that there’s a chance of giving savers too much confidence to put their money with riskier deposit-takers.

Growing Kiwibank

Moving on to one of the Commerce Commission’s other key recommendations — enabling Kiwibank to grow.

In order to achieve this, the Government, which owns Kiwibank, would need to either inject billions of dollars of capital into Kiwibank, or forgo some control of the stateowned bank by enabling it to bring in capital from a third party. Neither option is particularly politically appetising.

Open banking

Finally, to the Commerce Commission’s third key recommendation — getting the Government to tell banks they need to have open banking operational by mid-2026.

Open banking sees financial technology firms provide some banking services using banks’ infrastructure.

Opening banking should promote innovation by making it cheaper to make payments or helping people budget by bringing together all their financial information in one app, for example.

With the proliferation of sophisticated scams, banks are urging people to keep details private.