Gareth Vaughan is encouraged to see 4 key issues featuring in the banking competition probe, but wary and sees an elephant in the room

Encouragingly the Commerce Commission market study into retail banking appears set to probe four key issues. However, whether it achieves much for retail banking customers remains to be seen, it won't address business banking, and leaves the elephant in the broader room of the New Zealand banking economy untouched.

The four issues I'm encouraged to see under the spotlight are barriers to new competitors, innovation, switching between banks and profitability.

“The Commerce Commission will focus on examining barriers to new competitors entering or expanding in the market, the introduction of innovative products and services and consumers’ ability to switch between banks," Commerce and Consumer Minister Duncan Webb said in Tuesday's announcement.

“As part of the study, the Commission will examine banks’ profitability and other financial measures to assess competition in the sector."

There's existing competition to the oligopoly of the big four banks but it lacks teeth. In key areas the NZ banking sector's an innovative laggard, switching is straight forward but not well understood, and the big four's profits are high by international banking standards. There is certainly scope to improve the lot of the NZ retail banking customer.

Back in March I wrote about how a simple - but not widely understood - bank switching process has been in place since 2010. Consumer NZ’s latest annual banking survey provides evidence of the low number of people who switch banks, with just 4% doing so, unchanged year-on-year. Moves to improve public understanding of how easy it is to move between banks are welcome and long overdue.

That same article also looked at how NZ's a laggard in payments innovation, where the bank-owned Payments NZ governs NZ’s core payment systems. NZ has also moved at a glacial pace on open banking, and fintechs have made little impact. So any moves to encourage innovation are also welcome.

The competition's there but it's miniscule

In the March article I also noted there are 15 or 16 banks offering mortgages and term deposits, plus a range of building societies, credit unions and other non-bank lenders, but the oligopoly - ANZ, ASB, BNZ and Westpac - continues to almost completely dominate the NZ retail banking market with 85% to 90% of mortgage lending and deposits.

Greater public awareness of the ease of bank switching could help. But also the likes of Kiwibank, TSB, The Co-operative Bank and others could promote switching much more than they have. Having been left out in the cold during the Covid period, politicians now appear to be considering the role of building societies and credit unions. They're talking about making the Deposit Takers Bill, which will regulate banks and non-bank deposit takers together rather than separately as is now the case, more friendly to the likes of building societies and credit unions. 

And the Reserve Bank has launched a review of its Exchange Settlement Account System access policy and criteria, through which it'll consider offering broader access to settlement accounts, including potentially to non-bank deposit takers.

The non-banks play a useful role in some regions and communities. However, they are miniscule with, for example, just $5.7 billion, or 1.64%, of total outstanding housing lending. Banks hold the other $342.313 billion, dominated by the big four's share.

Over the past decade or so NZ's big four banks have consistently come out as among the most profitable when compared to their international counterparts across a range of measures including net interest margins and return on equity. They've also been generous dividend payers to their Aussie parents, and have strong regulatory capital in comparison to international peers.

Business banking excluded, BGF bubbling away

Announcing the market study to the media on Tuesday, Finance Minister Grant Robertson appeared a defensive when asked why business banking was excluded from the market study.

"If we included every aspect of banking it would be a five year ordeal," Robertson said.

The Government has been trying to stitch together a shareholding partnership with the major banks in a Business Growth Fund (BGF) that would make equity investments in small and medium sized businesses. Modelled on a BGF their Australian parents already participate in, the major banks are yet to publicly commit to this.

"We have been working with retail banks around the details of the Fund, including when it may be implemented. That work continues and has not yet concluded," a spokesman for Robertson says.

Meanwhile, Webb said draft open banking legislation was set to be revealed this week.

Politicking

There's certainly a whiff of politicking around the market study. It could have come any time over the past couple of years and a preliminary issues paper will be released in August, not too far away from October's election. That said the opposition National Party's call earlier this year for a quicker but shallower Select Committee inquiry had the scent of running interference about it from the major party that's typically closer to the big banks.

And of course through Kiwibank, which the Government moved to direct ownership of last year, the Government does have a dog in the fight. There'll certainly be those watching carefully to see how that potential conflict of interest is managed.

The elephant

So what's the elephant in the room I noted in my introductory paragraph above? It's NZ's over priced housing market. Admittedly I'm going off on a tangent here and never expected this issue to be addressed by a Commerce Commission market study into retail banking. But humour me, it's one of my hobby horses.

Despite house prices giving back much of the insane 2020-2021 surge to a peak in November 2021, the national house price to income multiple is still running at 7.2 times, with Auckland at 8.8 times. A median multiple of 3.0 times has been regarded as a good marker for housing affordability.

Banks' regulatory capital requirements are set by their prudential regulator the Reserve Bank, which adds its own spin to the international Basel capital rules. These encourage banks to lend on housing over other forms of lending and, of course, won't be touched by the Commerce Commission probe. They've also been more favourable to the big four banks than their smaller, NZ owned competitors, something that will improve as new capital requirements are phased in by 2028.

The record low interest rate environment of 2020 and 2021 saw the value of new mortgages run at an annual rate of about $100 billion as banks shoveled money out the door. Banks grew housing lending as a percentage of their total lending. For example ANZ NZ, the country's biggest bank, now has 71% if its lending exposure to the housing market up from 63% in 2019.

Aside from regulatory capital settings, there are other factors as to why banks love housing so much, as discussed in our Of Interest podcast with Victoria University's Martien Lubberink last year.

Having our major banks with such a large exposure to a single asset class comes with financial stability risks, of course, and doesn't encourage growth in productive and sustainable businesses that create jobs and support communities. Nor arguably in the construction of a large volume of actual affordable housing.

Changing this wouldn't be easy, and would require the political, regulatory and voter will that NZ appears to lack. Certainly a Commerce Commission market study won't do it.

Will the market study see mortgage rates fall plus savings and deposit rates rise? Will it see bank fees reduce and/or become more transparent? Will credit card interest rates fall? Will it see stronger competition from minnows and new entrants emerge? Will more customers start moving between banks? And will a range of innovative products and services sweep through NZ banking?

The big four banks are good at obfuscation, delaying change and partnering with threats to their business. So in terms of the market study providing clear benefits for retail banking customers, the proof will be in the pudding.

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