Reserve Bank balks at commission’s suggestions
The Reserve Bank has criticised proposals from the Commerce Commission on how the central bank could play a role in bringing about more competition in the banking market.
The Commerce Commission proposed a range of regulatory tweaks in a draft market study report into the banking industry in March that would be aimed at making it easier for Kiwibank and smaller banks to lend more money at a lower cost with less capital.
Included was a suggestion that smaller banks should not face any disproportionate burden funding the forthcoming bank deposit guarantee scheme, which is administered by the Reserve Bank, even if it was assessed that they had a higher risk of failing depositors.
Its March report concluded New Zealand’s big four banks were highly profitable and operated as an oligopoly without strong competition in the personal banking market.
Reserve Bank deputy governor Christian Hawkesby said in a submission released yesterday that it welcomed the market study and wanted a financial system that was inclusive, trusted, resilient, efficient and competitive.
The draft report provided a useful analysis of the current market structure and made some valuable recommendations on how competition could work better for consumers, he said.
“We strongly support the report’s recommendations to speed up implementation of open banking, reducing barriers to switching bank accounts, enhancing financial literacy and improving access to banking services,” Hawkesby said.
But he said the Reserve Bank disagreed with the commission’s analysis of its prudential capital settings and a recommendation they be “re-reviewed”.
“The current bank capital framework is the result of a careful and extensive review process that occurred recently and is still being phased in.
“The review included consideration of competition and resulted in several changes to support levelling the playing field between large and small banks,” he said.
Hawkesby said the changes the commission suggested to the bank’s risk-weighting framework would only result in very marginal benefits to competition and could have “unintended consequences and put us out of step with international regulatory approaches”.
The Deposit Takers Act already allowed the bank to “consider competition” in its decisions, he said.
Hawkesby said the Commerce Commission should place more emphasis on policy changes that would result in more disruption and innovation “both among the larger players and across the industry as a whole”.
The Reserve Bank accepted in its submission that “regulatory barriers” could be a barrier to new competition in the banking market. But it said regulations reflected the “important social position banks have as entrusted safe-keepers of other people’s deposits”. It also made clear its view that there could be advantages in having large banks serve the market.
“Large banks are able to gain significant scale, scope, and funding-cost advantages compared to smaller peers.
“Larger banks can also be more able to sustain the investments needed to bring innovative products and services to the market, for example new payment methods,” it said.
The Commerce Commission’s draft market study placed most emphasis on encouraging technical “open banking” reforms to support greater competition.
These could make it easier for a new breed of financial services firms to integrate with the existing banking system and offer a seamless service to customers, potentially chipping away at some of their market power, but are expected to be a slow-burner.
The commission stopped short of coming out in favour of bank number portability, a policy that would mirror the service that currently allows New Zealanders to switch between telcos simply by assigning their mobile number to a new provider.
The Reserve Bank agreed open banking could be a catalyst for innovation and said it was in favour of “reducing barriers that prevent consumers from switching bank accounts and embracing multi-banking”.
But it did not directly address the issue of bank number portability in its submission.
The commission’s draft study called on the Government and banks to work together to ensure a range of behind-the-scenes changes need to support open-banking services were in place by June 2026.
However, competition advocate Tex Edwards has said the commission’s report lacks any realistic enforcement mechanism to ensure any such target was met, if it was set.
Edwards renewed his criticism of the banks in his submission on the draft report, saying they enjoyed “unprecedented profitability” and were delivering poor outcomes for customers.
The commission’s report had failed to address the question of what international best practice was in open banking and “just how far New Zealand is behind”, he said.
“Severe penalties” were needed for missing open-banking deadlines and ANZ and ASB should also be “broken up”, Edwards said.
Kiwis wanted price and innovation competition “not more small bespoke pretend competitors”, he said. “Kiwis will win when the challengers enter the market at scale” and a review was needed as to why the launch of Kiwibank did not make an impact on the banking market, he said.