Quick strategies needed for banking competition

Much to the surprise of Squirrel’s chief executive David Cunningham the inquiry “got real legs as it progressed and the result is a quality succinct report with a number of important recommendations”.

The inquiry criticised the lack of competition in the banking sector, saying the “Big Four” Australian-owned banks reap higher profits than their international peers and recommended lower barriers for new entrants.

It also called for the Reserve Bank to adopt “market efficiency” as one of its key objectives after hearing evidence that it is too focused on financial stability.

However, the inquiry’s final report says its findings on the state of the sector largely mirror those of the Commerce Commission’s report into personal banking released last year.

Cunningham says while the ComCom report is a 400-page brilliant piece of analysis, it is woeful on things that will make a difference. 

“The select committee report on the other hand will add impetus to making the banking sector more competitive if it delivers outcomes.”

Recommendations he believes are on the right track are:

• Opening the door to more overseas banks/fintechs (HSBC’s withdrawal from retail banking was an example of what is wrong with the current state);
• Continuing to strengthen Kiwibank.  More capacity equals more competition. The government has given Kiwibank the green light to raise up to $500 million of capital to help it grow. Kiwibank is well positioned to be the vehicle of change we need for the sector. It has a strong, trusted brand in New Zealand, is a great business and is well run. It’s the smallest of our big banks, which means there’s a huge potential upside to be gained by it becoming more competitive – allowing it to quickly chip away at the big four’s market share, Cunningham says.
• The review fees/profits on everyday accounts is too weak.  It should be broader:  apply fairness principles to review bank savings and transaction accounts, credit card interest rates and interest charging methodologies, and bank pricing of floating rate mortgages.  All of these are the cosy banking oligopoly in action.
• Standardisation of loan application frameworks makes everyone’s life easier.

Cunningham says a New Zealand version of APRA, Australia’s prudential supervisor, should be created rather than appointing an RBNZ prudential policy committee. “An ‘NZPRA’ could pick up elements of FMA prudential supervision as well. So right idea, wrong mechanism.”

The report won’t necessarily result in a massive change competition-wise, he says, but it has got to be a better set of recommendations than the ComCom report.

“Ultimately, competitors create competition, and it is new financial services models and international competitors (the “maverick”) that will have the most impact. 

“The problem NZ has is that it’s the size of a small city anywhere in the world.  So other than rolling out a global model – Revolut, Wise or similar – it’s unlikely a major competitor, like Macquarie has been in Australia, will enter the market.”

Macquarie has grown from nothing to 6-7% market share, driving down prices, and chipping away at bank margins – now at 1.8% in Australia, compared to 2.5% in New Zealand.

Capital requirements

Squirrel says the RBNZ will ultimately revert to a one in 100 year crash scenario – the global norm – from a one in 200 year scenario for banks’ capital requirements.

The central bank is already proposing changes to banks’ capital settings, even though it hasn’t mentioned the select committee recommended the RBNZ cancel immediately any increases in banks’ capital requirements built into its capital review programme.

The RBNZ instead says a “higher risk appetite” is the reason for lowering settings.

RBNZ officials say any changes in lowering capital requirements  are not expected to trigger significant movements in lending or deposit rates, noting the OCR and wholesale markets remain the dominant drivers.

However, Cunningham says if capital allocation to loans falls, so interest rates will be somewhat lower.  “Remember, the ComCom had this as a draft recommendation, but former RBNZ Governor Adrian Orr jawboned the commission to remove it.”

Consultation on capital settings is now open to October 3.

The consultation paper sets out two options for overall capital ratios, both materially reducing requirements compared with 2019 decisions.

Submitters to the ComCom and select committee inquiries into banking competition raised concerns that New Zealand’s capital settings may be overly conservative compared to its international peers – potentially limiting competition and economic growth.

A subsequent RBNZ commissioned report found the Tier 1 capital requirements for the big four Australian banks are relatively high by
made is to reduce the minimum capital requirement for deposit takers from $30 million to $5 million. This reduces barriers to entry.

A final decision on banks’ capital requirements will be made by the end of the year.