TSB demands much wider and braver changes to banking rules

TSB Bank is calling for changes to bank capital rules and other regulatory changes to create a level playing field for the smaller banks so they can better compete against the big four Australian-owned banks.

Appearing before parliament's finance and expenditure committee (FEC) last week, TSB chair Mark Darrow said giving the government-owned Kiwibank more capital would make little difference to banking competition.

“We certainly challenge the strong focus on Kiwibank as the main remedy to the current oligarchy,” Darrow said.

“While extra capital of half a billion is incrementally accretive and positive, it may create $3 billion to $4 billion of lending. That is not a discernible system effect on a market that is circa $400 billion, less than 1% in fact,” he said.

“A much wider and braver system approach to creating more competition is required.”

Darrow said access to capital is more difficult for the smaller banks and that the more relative capital a bank holds, “the less your returns are.

The Reserve Bank's capital settings impose an impost and disadvantage of the smaller banks which have to hold significantly more capital than the big four banks on very similar loans.

“That is not a level playing field that promotes competition,” Darrow said. “We need settings that promote the growth of all banks, large and small, and new entrants including the fintechs, against the oligopoly we currently have in this country.”

He complained about the disproportionate impact of the capital rules on smaller banks and that they reward the scale of the major banks.

“We need settings that promote the growth of all banks, large and small, and new entrants including the fintechs, against the oligopoly we currently have in this country.”

TSB chief executive Kerry Boielle told the committee that while RBNZ has made changes to its rules that somewhat reduce the disadvantages smaller banks face, the big four banks still have a 1.2% higher return-on-equity advantage over the smaller banks.

Boielle also called for a reduction in the cost of regulation and compliance.

“We absolutely acknowledge good regulation is critical to a functioning and robust financial system,” but reporting rules could be streamlined to lessen the costs and burden on smaller banks.

Boielle suggested the government look at the approach to capital of the Australian Prudential Regulatory Authority (APRA) to find ways to provide better access to capital for the smaller NZ banks.

But currently the Australian-owned banks have access to a broader range of capital sources and at cheaper prices than is available to NZ-owned banks.

“We struggle to get a return of 5% or 6% on equity,” Boielle said. “They're getting two or three times that.”

Darrow added that returns of 5% or 6% “is sub-optimal” when TSB's cost of capital is about 9%.