sign up log in
Want to go ad-free? Find out how, here.

Gareth Vaughan suggests bank capital will again be a key area of debate as parliamentary select committees inquire about banking competition

Banking / opinion
Gareth Vaughan suggests bank capital will again be a key area of debate as parliamentary select committees inquire about banking competition
Photo by Corina Rainer on Unsplash.

Commerce and Consumer Affairs Minister Andrew Bayly may expect to receive the final report from the Commerce Commission's market study into competition in personal banking services within 69 days, but the Government's not letting the grass grow under its feet in the meantime.

Against the backdrop of noisy calls for an inquiry into rural banking from lobby group Federated Farmers during Fieldays, Finance Minister Nicola Willis on Wednesday announced a select committee inquiry into banking competition "with broad and deep criteria to focus on competitiveness, customer services, and profitability." 

The Finance and Expenditure Committee will lead the inquiry, in conjunction with the Primary Production Committee, which will focus on rural banking. The two select committees have been asked to jointly develop the terms of reference.

This inquiry was, of course, promised in the National-NZ First coalition agreement after last year's election. And the Commerce Commission probe was, of course, launched by the previous Labour government before last year's election.

Having issued its draft report, complete with 16 recommendations in March, the Commission's final report is due by August 20, after which the Government will consider its recommendations.

Thus it's quickly turning into the year of banking competition inquiries. It remains to be seen, however, whether New Zealand bank customers will be better off when all is said and done.

Shift of focus away from housing to 'productive' sectors?

In an episode of our Of Interest Podcast in February, Bayly told me a select committee banking inquiry could look at how to encourage banks to lend more to "productive" sectors of the economy such as small businesses, farming and property development, rather than having such a big focus on "unproductive" housing lending.

Given banks' regulatory capital rules deem houses safer assets to lend against than farms or businesses, lenders currently have to hold less capital against housing loans, making them more lucrative. 

Following through on what Bayly suggested would mean changes to bank regulatory capital rules, set by the Reserve Bank and based on international standards. 

Interestingly, Commerce Commission Chairman John Small told me in another episode of the Of Interest Podcast that of the Commission's 16 draft report recommendations, he ranks the below as the most important;

The Reserve Bank should review its prudential capital settings to ensure they are competitively neutral and smaller players are better able to compete.

From a competition perspective, unless a different approach is clearly justified, we think all banks should be required hold the same level of prudential capital for loans that have equivalent risks (which we consider includes major categories of home loans).

It should be noted here that Small ranked that ahead of juicing up Kiwibank so it can better compete with the big four banks and pushing through open banking. 

And it's important to note the Commission's point is about a capital advantage the big four - ANZ, ASB, BNZ and Westpac - enjoy over other NZ banks (explained here), not about whether overall levels of capital are too high.

In an article after the release of the Commission's draft report I asked

A key question now is to what extent they [the Reserve Bank and the Government] are prepared to move the prudential regulation of New Zealand banks away from international orthodoxy in an attempt to make banking more competitive for consumers?

The answer, from the Reserve Bank to the Commission, was an emphatic 'sod off.'

Will the Reserve Bank's answer be any different if the select committee inquiry throws up the same question, albeit this time suggesting a better alignment of capital requirements for business and rural lending with housing lending?

In April I asked Reserve Bank Deputy Governor and General Manager of Financial Stability Christian Hawkesby about the potential for a select committee inquiry to delve into this area. Here's what Hawkesby said, just before a Reserve Bank PR person shut down the interview, saying Hawkesby needed to move onto another engagement.

We're really straying more into government policy than central banking or prudential policy. And if it's government policy, then there can be mechanisms by which the Government facilitates that as opposed to the central bank or the regulator. Yeah, I accept that.

Key thing from us would be you'd want to ensure that there was continued confidence that the prudential regulation of your financial system for financial stability reasons is achieving, you know, achieving that objective and purpose that's set out for us.

What does NZ First want?

It is, of course, important to note the select committee probe comes about as a result of a coalition agreement between National and that most idiosyncratic of NZ political parties, NZ First. Just what NZ First wants remains to be seen.

We know what they said they wanted before the election. This included creating a government guarantee to boost the capital of NZ owned banks with the idea being this would enable one of them to ultimately replace Westpac as government banker.

Grumpy farmers

The probe into rural banking, to be led by the Primary Production Committee, comes after the Committee initiated a briefing to investigate practices in rural bank lending in late March. In a submission to that, Federated Farmers said its surveys show 81% of farmers have a mortgage, with an average size of $4.26 million and an average interest rate of 8.26%, meaning the paying of $350,000 of interest annually.

Federated Farmers also writes of "a significant shift in farmer sentiment towards banks" over recent years.

The number of farmers saying they are either ‘Satisfied’ or ‘Very Satisfied’ with their bank has fallen from being consistently just over 80% prior to 2018, to recently reach a record low of 55.8%. The number of farmers who say they feel they have been put under undue pressure by their bank has increased from only one in 20 in 2015 (5%) to an incredibly worrying one in four today (25%).

Federated Farmers observed that an alarming increase in the occasions of farmers noting that stress with their banker has had an impact on their mental health. In our most recent rural banking survey, we asked if issues with banking have had an impact on mental health. Alarmingly 44% of farmers answered “Yes” to this question. Of particular concern is that over half of sharemilkers answered yes to this question.

Its submission also pushed back hard against rural lenders' efforts to reduce their financed greenhouse gas emissions.

Annual profit north of $7 billion

In terms of profitability, the NZ banking sector has made net profit after tax of more than $7 billion the last two years. and other independent parties who've looked at key profitability measures such as return on equity and net interest margins have consistently found NZ's big four banks come at, or near the top, when measured against banks from comparable countries.

We know the big four have significant market power, with market share pushing 90% in the mortgage and deposit markets, dominating business lending and only facing real competition from Rabobank in rural lending. And we also know housing lending as a percentage of total lending has been rising. For example ANZ, which has 30.5% of the housing lending market, has grown housing lending as a percentage of its total lending to 72% from 63% in 2019.

Willis says she expects the select committee inquiry to hear submissions from banks with their chairpersons and chief executives made available for questioning.

She also expects the inquiry to investigate the state of competition in the banking sector, including business and rural lending, barriers preventing further competition, and any possible impact of the regulatory environment on competition and efficient access to lending which could include seeking evidence from regulators including the Reserve Bank, Commerce Commission, and Financial Markets Authority.

With the likes of Federated Farmers and other interested groups likely to queue up to take a crack at the banks and/or the Reserve Bank in front of an audience of politicians with all that entails, it could be a case of grabbing some popcorn and a good seat because this year of bank inquiries is only just getting started.

*This article was first published in our email for paying subscribers early on Thursday morning. See here for more details and how to subscribe.

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


Farmers often prefer more personal service with regards to banks as they have traditionally had to go into the nearest town to deal with a bank, as well as the large sums they are dealing with. I can't imagine with many rural banking outlets being shut down , that this disconnect between the bank and a real person would sit well with them.


My prediction. 

Lots of recommendations. All well intended.

Adrian Orr digs his heels in under cover of using international benchmarks.

Conversations drag on for twelve months.

In the meantime Reserve bank engineered recession succeeds and interest rates come down 1%-2% with more to come.

Sting goes out of mortgage payments.

Federated Farmers and co find something else to focus on.

Adrain Orr carries on as usual.




A bank can always hand a property to a real estate company to see mortgagee, a tiny bit harder with a farm...     you may well loose a higher %.   Also the RBNZ simply have a higher risk weighting.


given 72% of loans are to resi houses, there is going to be a lot of egg on face if the house market goes Ti&s up


"Also the RBNZ simply have a higher risk weighting."

And that's part of problem. By stipulating a higher risk weighting, the RBNZ de-risks lending activity for the banks and drives more lending to less productive areas of the economy at the expense of more productive areas.

It is a "policy setting". Pure and simple. Whose should be making such policies? The un-elected RBNZ? Or our elected government?


And therein lies the issue, the risk weightings reflect what the RBNZ see as the risk of supplying credit, not a social call on the application of credit, its like a margin requirement on a futures contract, its about implied vol, not that I would rather see people trading cocoa, milk, of pork bellies.       

WE removed LAQC

the ponzi continued

We removed depreciation

the ponzi continued

we removed interest deductibility

the bloody ponzi continued


well now the bubble has burst...     nothing can put humpty dumpty together again.

re farms, I am not sure banks should be lending to 2-3% yield businesses either at low cap requirements... most farms make there dosh out of...

oh yeah tax free cap gains.



Well done Gareth.

The more people that question why our banking system is as it is - the better for NZ Inc.

Why do I say that?

Well, as I've suggested people do, look around from the outside of our banking system and ask, "Who is it working for best?"

Once everyone is clear on that answer, the next question is, "Who made it like that?"

And in seeking answers to that question, I'm reminded of the old adage:  "Never attribute to malice that which can be adequately explained by neglect, ignorance or incompetence."


Farming & its downstream products & services is pretty much all there is for banks business-wise in NZ. Yes, residential mortgages is a big business, but our productive lands combined with our great natural rainfall & temperate climate is still the crucial cornerstone for this nations ongoing wealth & position on planet earth.

The cost of that land can be quite high when compared with say Australia & North America for similar products, hence the big mortgages that go with that as a going concern. How the big banks manage that is a combo of the times we are in, current law & regulation & its enforcement & the big commercial banks arrogance to just do what they want to do regardless.

Remember too, that while the Aussies get more their sticky little fingers on more than their fare share of the profits from these NZ based institutions, a lot of that in turn, then heads off north-east over the Pacific to North America, where a lot of it originated from in the first place. It's hard being at the bottom of the food chain.


Residential is 72% of lending.....    farming and agri is...

lets just agree, lending on land is big business


"Farming & its downstream products & services is pretty much all there is for banks business-wise in NZ."

Seriously? Methinks you need to get out more.


Maybe the differential is covering risk - there seems to be this belief that all business will succeed so what’s the problem. Especially in farming we seem to believe it’s a right that no one loses their farm. Almost sacred cow syndrome and without it the world will end.

The reality is it’s higher risk and farms/business can fail, and will, and houses are less risk.

Just reading an article this morning and only 25% of businesses last over 10 years. You don’t see 75% house mortgage failures within 10 years.

Farms are far more resilient but for many they make no true profit and capital gain is the only gain.

Bring on open banking etc and reduce barriers to entry into the market. We will then see if this changes how risk is rated. Be careful what you wish for.


Get more popcorn Gareth this movie will be a long one and it will feature plenty of sequels