Whilst the push for greater bank competition is good news, it may also come with increased risk

As the push for increased banking competition in New Zealand snowballs, exciting times for customers could be ahead.

More competition for their custom, new products and services, new ways those products and services are offered, better prices, and the ongoing advancement of technology, promise much.

With the public, regulators and government seemingly aligned on wanting this, it's going to be fascinating to see how it plays out.

We've had the Commerce Commission's market study make 14 recommendations to boost competition for personal banking services. We've had Finance Minister Nicola Willis immediately say the Government will act on all 14 recommendations. And now we've got the parliamentary banking inquiry underway, which is also focusing on rural and business banking.

Against this backdrop, the Reserve Bank, tasked with maintaining financial stability, is facing criticism. This includes from Willis for having settings that are too conservative and discourage competition. She plans to issue the Reserve Bank with a new Financial Policy Remit. 

The Reserve Bank is now talking up proposals to make the regulatory burden more proportional, meaning smaller firms will have lower requirements. This includes reducing the minimum capital requirement for banks from $30 million to between $5 million and $10 million, and considering broadening the criteria for use of the term "bank."

As a long time advocate of more banking competition in NZ, it's an exciting time. That's even though a slightly disconcerting thought has crept into the back of my head.

It is that the brave new world we appear to be heading towards may also be one where we see failures of financial institutions. Whilst that's a sobering, and even frightening, suggestion, it's not a reason to maintain the status quo where the big four bank oligopoly reigns.

And nor is it a suggestion that any individual entities, or specific types of financial institutions, are going to fall over. 

It's just a suggestion that, as market entry barriers are lowered and the likes of open banking enable newcomers and new services, we can expect to see an increase in the number of entities competing for our business. They may not all survive. Some of them may make mistakes. Some nefarious activity may emerge.

Sorry to be a party pooper. However, I'm old enough to remember the demise of the finance company sector between 2006 and 2012, detailed by interest.co.nz's once infamous deep freeze list here.

Overseas there've been some notable bank failures over the past couple of years. Silicon Valley Bank in the US, for example, and global behemoth Credit Suisse. Such events led to use of the term "digital bank run" due to concern, or panic, spreading via social media. Closer to home, three Aussie neo-banks - Volt, 86 400 and Xinja, surrendered banking licences issued to them by the Australian Prudential Regulation Authority.

Of course much has changed since the great NZ finance company meltdown. Despite the potential for a regulatory liberalisation, I expect oversight of our financial entities will remain better and stricter than it was back then.

Human history tends to suggest, however, that when risk increases, there may be casualties along the way. We're also in the era of cyber attacks, a war against financial scams, rising geopolitical tensions, and climate risk. These aren't insignificant threats for customers and their financial institutions alike.

For savers an important point to note is the depositor compensation scheme is due for implementation from mid-2025. It'll provide protection of up to $100,000 per eligible depositor, per licensed bank, building society, credit union and deposit taking finance company, in the event of deposit taker failure.

There are some potential fishhooks in the compensation scheme. That said, politicians tend to be aware that depositors are also voters. Especially large numbers of depositors. Thus there's a history of governments bailing out failed financial institutions, or at least their depositors. See South Canterbury Finance, for example.

In the brave new world that may be just around the corner, we might also see more mergers and acquisitions among financial institutions as they joust for customers, market power and potentially survival.

As we move towards a banking world of more choice, more competition, better service and hopefully better prices, there should be much to look forward to. Given this is an industry that's all about managing risk, some mis-steps may occur. Nonetheless here's to the rewards comfortably outweighing any downside.

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