Reserve Bank says global financial crisis may have increased big four banks' market dominance, will monitor

Reserve Bank says global financial crisis may have increased big four banks' market dominance, will monitor

By Gareth Vaughan

The Reserve Bank says the global financial crisis may have entrenched the dominant position of the country's big four Australian owned banks and it will monitor lending markets for any signs this is affecting the availability or pricing of loans.

The central bank makes these comments in its bi-annual Financial Stability Report. Pointing to a New Zealand Institute of Economic Research report done for the central bank before the financial crisis, the Reserve Bank says despite high levels of concentration then, "sufficient" competition existed and the financial sector was contestable given reasonably low barriers to entry and exit.

"However, the financial crisis may have changed the competitive dynamics across the New Zealand financial system as a whole given that finance companies and international banks are much less involved in new lending," the Reserve Bank says.

"It is also interesting to note that our capital markets remain small and are a limited alternative source of financing for SMEs in particular, factors potentially reinforcing the predominant position of the four major banks."

The Reserve Bank says it will continue monitoring lending markets for any signs the dominant position held by the big four - ANZ, ASB, BNZ and Westpac - affects the availability of pricing or lending.

"We also intend to analyse formal and informal barriers to entry and exit in the current environment. This will include some of the reasons why customers might be reluctant to switch between existing financial service providers, something which may deter potential new entrants."

Reserve Bank to look at whether big four's branches & other infrastructure creates barriers to entry

Asked if the central bank could elaborate on these comments, a Reserve Bank spokeswoman told that  the central bank's analysis will look at things like whether the presence of existing banks’ infrastructure in the form of existing access to payment  systems, branch networks, access to international funding markets etc, creates practical barriers to new entrants. 

"It is not envisaged that a formal work programme will be built around this,  but the Bank may comment more about these sorts of issues in the future as a result of the analysis carried out," she said.

The big four banks, combined, held nearly NZ$313 billion, or 92%, worth of the NZ$340.65 billion of banking assets held by the main eight trading banks as of December 31 last year. The three New Zealand owned banks - Kiwibank, SBS Bank and TSB Bank - combined, held just NZ$20.5 billion worth of assets and Rabobank of the Netherlands NZ$7.2 billion.

This is against a backdrop where a total of 63 finance companies and other entities have collapsed since 2006 (see our Deep Freeze List for full details) and the introduction of non-bank deposit taker (NBDTs) regulations by the Reserve Bank, which now polices finance companies, building societies and credit unions, which has effectively increased the costs associated with running these businesses and lifted the barriers to entering the market.

NBDTs must now have credit ratings from an approved rating agency, governance arrangements designed to ensure they give proper consideration to the interests of all stakeholders, risk management programmes outlining how they will identify and manage key risks such as credit and liquidity risk, minimum capital requirements included in trust deeds, and restrictions on a deposit taker’s related party exposure and liquidity provisions enabling them to withstand a "plausible range" of shocks. (See a story on the NBDT regulations here and another here.)

Will look at lending margins

Meanwhile, the Reserve Bank says as it monitors competition in the financial services market, it will look directly at  specific product lending margins.

"For example, we have already considered home loan margins, which do not seem out of line internationally. This likely reflects the fact that banks do compete quite vigorously in that market."

KPMG's annual Financial Institutions Performance Survey released last week noted banks' profitability rebounded during 2010 with return on equity across the sector rising to 13.3% from just 1.5% in 2009 when the banks coughed up billions to settle their structured finance transaction tax avoidance disputes with the Inland Revenue Department. That 13.3% still lags the 17% to 22% return on equity the banks achieved from 2005 to 2008.

The Reserve Bank notes New Zealand banks recorded the highest return on equity among any banks from 22 Organisation for Economic Co-operation and Development countries between 2002 and 2007.

"This can be explained, in an accounting sense, by relatively low operating costs and a limited need to make provisions for bad loans over the period surveyed, coupled with reasonably healthy margins. However, there are difficulties in comparing accounting metrics like this across countries," the Reserve Bank says.

"It is also interesting to note that, as in Australia, return on equity for the bank sector is not that high relative to that achieved by some locally listed companies."

In their recently completed financial half year the big four banks reported a combined NZ$1.26 billion profit, up NZ$312 million, or 33%, from NZ$952 million in the same period of the previous year despite flat lending growth.

Meanwhile, in an attempt to make it easier for customers to switch between banks, Kiwibank's CEO Paul Brock would like to see the banking industry emulate its telecommunications counterpart and introduce bank account number portability so when customers switch banks they can take their bank account number with them.

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92%....and if one of them should fall...there'll be 3 of the buggers sitting on the wall....3 bloated banks sitting on the wall.....da de da de da da...another one will fall.....

Don't worry Wolly. They're too big to fail or as Alan Bollard puts it "systemically important." So if the worst case scenario should eventuate, we taxpayers will step in. And Julia G won't let any harm come to their parents anyway.

Question. What qualifies at banking assets? Considering M3 is $226 Billion. 

Does this mean that the banks have significant assets tied up in an over inflated property market?

The Capital Rort

Found this one a good place to start - plausible explanation about the Australasian housing market.  I hope its all complete rubbish....

Trace it forward for ongoing discussion. Maybe the  Australasian housing market is 'too big to fail'.


Increased capital requirements as the values drop. I get that bit and it is scary.

Mind you I expect some banks to fail, but I hadn't realised that bit.

I do get the fiat system if flawed though, and what a great article to illustrate why. Nothing is too big to fail eventually.

Yeah the banks will be more than happy to re-value up in an increasing market to free up the capital, but i bet they're turning a blind eye to a weakening market and not re-valuing down.

If a failure occurs it wont be just one bank, it'll be the whole lot of them in the space of one week. I wouldn't be surprised if in the face of just a 15% drop in home prices the banking system would be teetering on the edge of total failure

No wonder the banks are dealing with mortgagee sales quietly. If public sentiment went negative and a 10% drop in prices occured and the banks were forced to re-value thier loans down there would be no way they could meet their capital requirements. Then it'd be straight back to the tax payer funded backstop. Cheers mate!

I've seen a house advertised for sale recently where I know the owners and I know for a fact is a mortgagee sale but its advertised as "owner has moved on, must be sold" with no mention of the sale being forced by the bank. They're trying to contain the situation all right.

That's a very useful article KWJ, and clearly indicates more nails in the coffin of the notion that self-regulation based on the premise of rational self-interest (it's not in the banks' interest to sully their rep.; mash their b/s) is all we require to maintain functioning markets and economically efficient allocation of resources - the other key premise in classical economics, that is also bollocks, without defining a complex context boundary set.

In many ways it simply looks like CB negligence, ours included. However,  it's worse than that I think, they must have been cognisant of the dynamics playing out before them, they are not stupid, at least we don't pay them like that.  Yet they steadfastly, stubbornly held to a religious like faith in an ideological policy framework that we know has and is failing, even though some cling to the vain notion that ours in NZshire is, "well regarded". What utter tripe.

Onwards and upwards dear donkeys - we're right behind you, not.

Cheers, Les.

Yes as do most "developed" nations.....


so if it's that bad aren't we wise to just borrow like crazy for the next few years, then when the whole system goes tits-up in a few years we can default and be happy?

Haha yes. I actually think that is what JK is planning on, because there can't be any other logic to his plan.

I have been talking to the good lady on this one, and wondering how we can pull it off on a private level. A farm perhaps?

thats the tricky thing.. maybe go to AMI and ask to buy some Credit Default Swaps on some particularly unhealthy looking mortgages??

Well ideally you want a "vehicle" so if it all goes to custard you are not personally left with any responsibility.........

The usual moral hazard I guess.



Yes. I shouldn't worry about what it to come to much as I am pretty handy and resourceful.

Just further on the banks thing above, do you think many actually own building they are in? They must do if their assets are more than M3, but logic says when you are in the business of lending money, that you lease and provide the mortgage to the landlord. 

I really do wonder what the hell the banks have as assets when they are 50% or so higher than the total money supply.