Jury out on bank competition, says minister
The Commerce Commission expects to release its draft study into competition in the banking industry on Thursday without knowing whether or not it is something it will ever complete.
The watchdog has spent about $3 million on each of its previous market studies into fuel, supermarkets and construction materials, so it can dig into the structures of those industries. There are no industries with bigger profits and where a lack of competition would be as much of a problem than in banking, so the week’s draft report should be a jewel in the commission’s crown.
Credit ratings agency S&P calculated last year, that over the previous five years, New Zealand’s Australian-owned banks enjoyed an average 12.5% return on equity, which was topped only by Canadian banks in its study.
Competition advocate Tex Edwards argued in a submission to the commission last year that the “average Kiwi household” would lose as much as $450,000 to $1m over their lifetimes because of excess margins paid to banks.
But the decision on whether the commission should complete its work is likely to come down to the recommendation of Commerce Minister Andrew Bayly, who has his own views on what regulators should have in their sights. “The big question is not whether banks are making too much money, but whether we’ve got adequate competition and whether people can get access to credit when they need it and the jury’s certainly out on that at the moment,” Bayly says.
His main concern is that businesses may not be getting easy enough access to fair bank loans, whereas the commission was instructed by the former government to restrict its market study to the personal banking services. There is a possibility the commission’s study may be terminated and its work handed over to a select committee inquiry into banking promised by the Government that is likely to have a different focus.
But Bayly says his mind isn’t made up, noting that for many smaller businesses, personal banking and business banking are inextricably interlinked, given it is typical for owners of small businesses to fund their firms by borrowing directly against their homes. He says he wants to first see what is in the commission’s report.
“From there, we’ll have to talk to our coalition partners, particularly NZ First, about what we might do. If it’s a particularly good report we might let it run its course.”
Whatever the decision on the study, Bayly appears under pressure to ensure improved banking competition is not an objective that slips through his fingers – including from senior figures within his own party. Former National Party leader Sir Bill English singled out banking regulation as an area in which the country could do better last year when discussing the work ahead of the Government.
“I happen to think there’s room to do better on banking regulation, because the availability of credit is vital,” English said. “Through the events of recent years we’ve got into a ‘no risk’ banking system. Risk is something that you take, not something you spend all your time trying to expunge.”
Bayly says it is inevitable that businesspeople will continue to put homes into hock to fund their firms, though. “It’s just inevitable that people will use the cheapest form of funding.” He agrees one way to tilt the playing field towards more active lending to productive sectors of the economy would be for the Reserve Bank to change the weightings that it gives to different types of loans when it assesses banks’ capital adequacy ratios.
The Reserve Bank assumes mortgages are significantly less risky than loans to businesses, meaning its rules advantage home loans when banks calculate how much to lend to whom and at what interest rates.
He soon expects to introduce a “consumer data rights bill” to Parliament that should make it easier for people to control their own banking and other data, and hence potentially simpler for them to switch between banks.
That is an initiative that was kicked off but not seen through to a conclusion by the former government.
“‘Open banking’ is not going to be a panacea but offers the prospect over time of making elements of banking subject to greater competition,” Bayly says. He places a lot of emphasis on an imminent overhaul of the Credit Contracts and Consumer Finance Act, which he argues became over-prescriptive under the former government and has blamed for “Kiwis missing out on loans”.
If anyone was hoping for a moment of denouement for the banks this week, they look set to be disappointed. But Bayly is hoping he can make a difference by chipping away on multiple fronts.