Economist Shamubeel Eaqub says New Zealand banks have avoided proper scrutiny for too long and he’s backing a market study to investigate record profits in the sector.
Eaqub, economist at Sense Partners, first called for a market study into banking in 2018, arguing NZ bank profits were excessive and it was “high time for the government and regulators to get tough”.
Since then bank profits have continued to grow, with the country's biggest bank, ANZ New Zealand, reporting its annual profit topped $2 billion for the first time in 2022. Westpac saw its profit break $1 billion in 2022, an increase of 12%.
NZ has 27 registered banks but four of them, ANZ, ASB, BNZ and Westpac, account for 85% of all bank lending.
Eaqub said a market study by the Commerce Commission into the banking sector would be a good start.
ANZ said in an emailed statement its profit needed to be viewed in the context of its size.
"ANZ’s capital is around half of the NZX top 10 companies combined, so we are large, and that is reflected in the size of our profits. However, our level of profitability is roughly on par with them ... While our profit was higher in 2022, we are also carrying extra capital. Our returns are still lower than what they were in 2019."
Commerce Minister Duncan Webb, who would need to request a study from the Commerce Commission, has said no decisions have been made about the next market study, but he was focused on using market studies to ensure markets operate fairly for consumers.
"I am particularly interested in improving markets where the greatest long term gains can be made for ordinary New Zealanders.”
The Commerce Commission has completed market studies into the grocery sector and residential building supplies.
Self-appointed watchdog Monopoly NZ, founded by businessman Tex Edwards, has come out in support of a probe into banking.
Edwards said Monopoly Watch believed the banking sector had enjoyed excessive profits at the expense of ordinary New Zealanders, and had proven resistant to competitive pressures.
He told media bank profits were costing New Zealanders $2000 a year.
A market study should look at what can be done to help bank competition from new entrants and why Government-owned Kiwibank had “failed to ignite competition in the banking sector”.
Any market study commissioned by the Commerce Minister should look into the structure of the NZ retail and small business banking industry at both the wholesale and retail levels, he said, and the nature of competition at the wholesale and retail levels.
It should also consider what is OECD international best practice in banking competition, and what model should NZ base its reforms and aspirations around.
Bad for small banks?
Massey University banking professor David Tripe said a pricing war between the big banks could come at expense of small banks, and decrease competition.
Tripe said costs were higher for small banks in New Zealand and they were less able to spread costs across a smaller customer base, and would likely be unable to compete if the big banks aggressively undercut each other.
"[Small banks] can't afford prices to move against them. So the question is, to some extent, if you think the big bank profits are too high, do you want to close the small banks down?"
Regulation could be one area where pressure and costs on smaller banks could be eased and improve competition, he said.
The combined effect of increased regulation and technology demands were making it difficult for smaller banks to compete.
"I'm not sure that the government really appreciates the extent to which that might be a problem."
Eaqub said beefing up regulatory capabilities at the Reserve Bank of New Zealand and Financial Markets Authority into bank conduct could be even better than a study, if done well.
“But these organisations must be held accountable, not just a rubber stamping board such as the RBNZ.”
The New Zealand Banking Association said any decisions about this would be a matter for the government.
21 Comments
How about this for an idea....
Long term loans for owner occupiers, 15/20/25 years, set interest..... full term, just like Fannie and Freedy
investors have to use existing term loans.
Fannie Mae and Freddie Mac were created by Congress. They perform an important role in the nation’s housing finance system – to provide liquidity, stability and affordability to the mortgage market. They provide liquidity (ready access to funds on reasonable terms) to the thousands of banks, savings and loans, and mortgage companies that make loans to finance housing.
Fannie Mae and Freddie Mac buy mortgages from lenders and either hold these mortgages in their portfolios or package the loans into mortgage-backed securities (MBS) that may be sold. Lenders use the cash raised by selling mortgages to the Enterprises to engage in further lending. The Enterprises’ purchases help ensure that individuals and families that buy homes and investors that purchase apartment buildings and other multifamily dwellings have a continuous, stable supply of mortgage money.
By packaging mortgages into MBS and guaranteeing the timely payment of principal and interest on the underlying mortgages, Fannie Mae and Freddie Mac attract to the secondary mortgage market investors who might not otherwise invest in mortgages, thereby expanding the pool of funds available for housing. That makes the secondary mortgage market more liquid and helps lower the interest rates paid by homeowners and other mortgage borrowers.
Fannie Mae and Freddie Mac also can help stabilize mortgage markets and protect housing during extraordinary periods when stress or turmoil in the broader financial system threaten the economy. The Enterprises’ support for mortgage lending that finances affordable housing reduces the cost of such borrowing.
At the very least start making the test rates count for something. If the banks want to stress test you at 5.8% that's fine, but make it the maximum rate that the borrower can be charged for the duration of the 25/30 year loan term.
Maybe we'll start seeing borrowers tested based on actual medium to long term risk, and not see that buffer encroached for the sake of increasing the loan book size.
Sure, if you want a test rate of 15%+ and are happy for FHBers to be locked out. Then the banks (including our own Kiwibank) will be seen as evil, right? Why dont you just say they have to have a 30yr fixed rate and be done? The problem is, there aint no funding for that at an appropriate yield in in NZ markets
Bank acc number portability is technically achievable, but is complex. The mortgage thing is a legal matter. I dont think thats easy to solve.
Banks hedge the mortgage ammounts as you draw down so if say you had a 2% rate and moved now, the new bank would have to fund that at 4%+ so thats not going to happen.
As a mate just messaged me, if you break a 2% when rates are 4% you should get compensated, you do in wholesale setting just not retail, think swaps etc.
Disingenuous talk from ANZ about their size justifying their big profits. Well of course it does but how come they are so big and what is their return on equity/margins as a result? If found to be less than competitive, why not reduce the size of the banks by reversing some of the naive commerce commission decisions of the last couple of decades e.g. Trust Bank sold to Westpac, National Bank, Countrywide Bank and Postbank ultimately sold to ANZ, by forcing a break up in the same way the UK did after the GFC?
I think it is disingenuous to talk purely about profit in dollars, when a more informative metric is Return on Equity. ANZ has ROE of 12%. That looks in keeping with US bank ROE and is lower than the likes of F&P Healthcare and Spark.
I'd like to see some objective analysis by int.co... esp as it's easy for us to invest on ASX. Im not saying the profits arent excessive, im saying no one has tabled anything on here that shows relative to capital that they are. Even Net Interest Margin isnt necessarily helpful, as RBNZ has increased capital requirements right (and will keep doing so), so as an investor I would expect NIM would need to increase to keep ROE the same? I guess the ultimate question is - what is an appropriate ROE that strikes that balance right?
Is there some law that says I can't open a bank account with Kiwi Bank? TSB? Coop Bank? SBS?
Is their some law that says I can't buy a shareholding in the wickedly profitable ANZ, Westpac?
And we seem to want an inquiry by a Government which demonstrably couldn't organize a booze up in a brewery! Note the unintended consequence of additional controls adversely affecting our small Kiwi owned banks.
Yet more gutless politicians, gutless ComCom and monopolies/oliogopolies milking NZ dry.
Its really simple:
1) It takes 6 to 7 companies with equal market share to have perfect competition. We are a long way from that - 4 companies with 85% market share in banking. (HHI index)
2) ComCom is too gutless to do a study into banks. It would rather waste time on a supply chain study. It also allowed ANZ to buy The National Bank helping create the current situation.
3) ComCom is too gutless to make strong recommendations, i.e. supermarket oligopoly study & requiring the breakup of the 2 dominant players. They let the mergers occur in the first place.
4) The government is too gutless to make stronger laws for ComCom to make sure it puts greater weight on competition.
I despair for NZ.
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