Time to regulate the mega-profit banks
High profits, illogical pricing – it’s clear that something needs to be done to tackle the power imbalance enjoyed by banks.
In New Zealand, home lending is 62% of all bank lending, and growing. There is a reason for this. Banks love lending on homes because it’s a low-risk way of making high profits.
The high profits are obvious, with banks making over $10 billion of pre-tax profits last year. That’s an average of $2000 per person, including children.
And the low-risk nature of those profits is because the mortgage is the last bill we won’t pay. We all need a roof over our heads, so default rates on home loans are very low.
So it’s no surprise that given home lending is lower-risk than (say) lending to businesses or agriculture, the banks want to do it much more.
This suggests cartel-like pricing by the banks, and the best evidence of this is how illogical mortgage rates are.
For example, why does someone with a mortgage of only 10% of the value of their own home often pay the same interest rate as someone borrowing 80% of its value?
On the face of it, this doesn’t make sense. An 80% mortgage is riskier, and should charge more interest.
But all too often, the same rate for everyone seems to be the norm.
And in the absence of proper competition, there is very little anyone can do about it. Try convincing your bank that you are lower-risk, and deserve a lower rate.
Perhaps the best example of mortgage mispricing is in reverse mortgages. They are the most expensive of all relative to their risk, because of an almost complete absence of competition.
One bank, Heartland, dominates reverse mortgage lending in New Zealand, with the Reserve Bank’s Financial Strength Dashboard showing it to have the joint highest net interest margin of any bank, and second highest Return on Assets.
Its rate calculator for my postcode quotes a reverse mortgage rate of 9% for 20% of the value of a home. But its floating rate for a first mortgage is a much lower 6.95%, and even less for a fixed term.
There are likely to be higher Reserve Bank capital requirements for Heartland to lend on a reverse mortgage than a first mortgage, but this is very unlikely to justify the large difference between what they quote for lending 20% of a home value on a reverse mortgage, versus 80% on a first home loan.
So if reverse mortgages are so expensive, why don’t the big four banks actively compete with Heartland?
It’s a question a bank inquiry should ask. Is it because vanilla home loans are simply too profitable for the banks to be bothered offering anything else?
An obvious way to help address mortgage misplacing is by having open banking.
Customers would get the same number portability they get with mobile phones, which would make switching their banks, and their mortgages, much easier.
But because it’s so difficult to switch banks right now, new competitors don’t enter our market.
Then-Commerce Minister Kris Faafoi wrote to the banks in 2019 saying he expected them to introduce open banking within six months. It speaks to their power and hubris that the banks seem to have effectively ignored it.
This inaction by successive Governments, and the hubris of the banks, means New Zealand is now an outlier amongst OECD countries in not having open banking.
And it is firmly in the hands of politicians to put this right. They have likely been duped by well-funded banking lobbyists into believing the industry will implement open banking itself.
But history shows they haven’t, and won’t. As has happened everywhere else, the banks need to be forced into offering open banking via regulation.
Otherwise, the costs to ordinary consumers could be even more billions in bank profits.
So why are the lowest-risk mortgages so expensive? A Commerce Commission inquiry can find all the reasons.
But there is a glaringly obvious one – a lack of open banking.
Time for the politicians to wake up, and step up.