Levelling up the prudential playing field main priority
Report clear signal that the RBNZ should stop blaming banks and others
The Commerce Commission’s draft report on personal banking services creates a meaningful opportunity to catalyse more effective competition and greater innovation in New Zealand’s financial services and credit markets.
Reducing unnecessary regulatory burdens is vital for competition. Competition in these markets is, in turn, important for reducing New Zealand’s cost of capital and providing a quick win for our productivity.
The report presents a lot of evidence clearly and concisely and draws sound conclusions.
It also provides a refreshingly honest critique of the Reserve Bank of New Zealand’s (RBNZ) performance as New Zealand’s banking prudential regulator from a credible source: another regulator. The Commerce Commission (ComCom) should be congratulated.
The report does not reflect positively on the RBNZ’s performance as a prudential regulator.
Four of the sixteen recommendations in the draft report are for changes in approach by the RBNZ, one for the Government to change the law to require the RBNZ to shift its focus to one of enhancing rather than maintaining competition and another for policymakers to seek competitive neutrality.
The commission’s chair, John Small, in an interview on the draft report, identified “levelling up” the prudential playing field as the number one recommendation in the report.
Against the national interest
The banks are playing by the RBNZ’s rules and responding to the incentives in front of them. Many of the rules go well beyond what is reasonably necessary to protect financial stability and are not in New Zealand’s interests.
The report is a clear signal that the RBNZ should stop blaming banks and others for problems in banking in New Zealand and instead look in the mirror.
The problems identified with the RBNZ’s prudential rules include bank capital requirements, treatment of types of bank capital, risk weights of lending classes, access to its transaction accounts that are available to large banks only, access to cheap funding from the RBNZ, the proposed approach to levies for the deposit guarantee scheme, and the approach to loan-to-value and debtto-income ratios.
They have all operated to unfairly affect large cohorts of New Zealanders and strengthen an oligopoly at the expense of innovation, competition and the adoption of 21st-century banking technology.
These problems are widely recognised and discussed in the banking sector, but the big banks are not inclined to challenge them because they benefit from some of them and are wary of criticising the RBNZ. They did that in the 2017 RBNZ capital review and received a strong reaction.
Since then, New Zealand’s big bank CEOs have been noticeably absent from public discussion of the RBNZ’s bank prudential management.
‘Stability of the graveyard’
RBNZ decisions are seen by some as being more determined by confirmation bias than open-minded and curious consideration of the evidence. That, in turn, has caused the RBNZ to mistake unstable stasis for stability — effectively delivering what a former governor of the Bank of England called the “stability of the graveyard”.
The RBNZ has little interest in competition in the financial services and credit markets and, in practice, appears to see it as incompatible with financial stability.
There is clear evidence that competition among banks improves financial system stability — instead, we have a system critically dependent on four banks whose market share is put at 90 per cent when, even in Australia, it is only 72 per cent.
We need only look across the Tasman to see a market delivering a lot more competition to the benefit of consumers and business.
Macquarie Bank’s aggressive entry into the residential mortgage market and now the business market is an example. There is no sign of the ANZ introducing to New Zealand its new ANZ Plus digital-only platform, which it says it will use to aggressively compete for business customers in Australia.
Refreshingly, the big Australian banks who own 90 per cent of the market in New Zealand are recently reported as saying they want to take more risk in Australia.
It can only be hoped they will be allowed to in New Zealand as well.
We do not need to spend long thinking about what the RBNZ is going to do in light of the draft report.
Nothing to see here
The RBNZ clearly does not have the inclination to fix its problematic rules or even accept they are problematic. The Herald reported an immediate RBNZ response, which suggested nothing was going to change at the RBNZ.
That was confirmed in an interview with the governor where he sought to deflect criticism of the RBNZ by pointing to other areas of the report, and in an opinion piece that failed to mention the report or the impact of regulatory burden at all.
Oddly, the governor pointed to the key issues such as open banking, which the RBNZ (quite rightly) has had very little involvement in, and payment innovation, where the key enabler — access to exchange settlement accounts — has taken the RBNZ seven years and counting to develop a policy on.
The RBNZ is not even taking the relatively standard approach of saying, “we are taking the findings in the report and its recommendations seriously”, much less with “an open mind”, which is the legal standard required of a regulator.
This is a cavalier approach to a report commissioned by the Government and undertaken by a fellow regulator that a prominent and highly respected economist leads.
Wasting time
The RBNZ’s response just reinforces concerns about entrenched bias at the RBNZ and unwillingness to consider criticism.
One can only wonder what the RBNZ’s board of directors and particularly its new directors think about this.
The important question to ask now is, what is the Government going to do in light of the draft report and the RBNZ’s response?
Is the Government going to insist that the RBNZ listens to ComCom and changes its rules?
Prime Minister Christopher Luxon and ministers Nicola Willis, Simon Watts, David Seymour, Shane Jones, Paul Goldsmith, Chris Bishop and Andrew Bayly have all served on the finance and expenditure select committee in Opposition or had finance portfolios in government.
The FEC has parliamentary oversight of the RBNZ.
They have seen how the RBNZ operates first-hand.
A select committee inquiry and waiting for the ComCom report to be finalised is a waste of precious time in our difficult economic circumstances.
Labour members of the committee, Duncan Webb and its chair, Barbara Edmonds — both former chairs of the FEC — saw the RBNZ up close in their former roles, too. They would be hard-pressed to find any sensible objection to this Government addressing the performance of the RBNZ in prudential management.
After all, it was Webb who commissioned the market study because of concerns about the influence of the big four banks.
He should now be advocating strongly for the Government to do something about it.
Sorting out the RBNZ offers political points from Gen Z, Millennials, Mā ori, Pasifika, superannuitants, small and mediumsized businesspeople, their employees and farmers.
It is hard to find a loser.
As the Minister of Finance, Willis can point the way by amending the Financial Policy Remit to which the RBNZ must have regard, albeit that it is no more than a requirement to “have regard”. Ultimately, the RBNZ can politely ignore her.
Big bank CEOs have been noticeably absent from public discussion of the RBNZ’s bank prudential management.
No case for independent prudential rule-setting
Unlike monetary policy, banking prudential policy is not and should not be set independently of the executive and Parliament.
Banks are properly regulatory creations that reflect a post-World War II set of bargains between mostly foreign equity providers, domestic borrowers and depositors and New Zealand taxpayers as the ultimate underwriters of the system.
Parliament delegates the setting of the rules to the RBNZ, but it is only a delegation, and Parliament can legitimately direct what those rules say — in detail, if necessary, as other parliaments have in the Western world.
Parliament can properly decide what our banking system looks like and how regulatory settings can get it there. The enforcement of the rules is appropriately independent of political interference — but not the setting of them.
At the very least, the Government should appoint a prudential policy committee consisting of experienced and independent, non-executive individuals with the skills to be responsible for the RBNZ’s prudential management.
It should give that committee a statutory mandate by amending the Reserve Bank of New Zealand Act 2021. Nothing is likely to change without new leadership overseeing our prudential policy.
This would not take long.
It will win political points. Let’s not waste any more time.