Reserve Bank governor links huge bank profits to a lack of investment

Monday, 5 November 2018

Financial Markets Authority chief executive Rob Everett and Reserve Bank governor Adrian Orr deliver the findings of their joint review into the conduct and culture of banks in New Zealand. First published in 2018.

The head of the Reserve Bank is questioning whether New Zealand's banks are making super-profits by under investing in areas such as protecting customers from misconduct.

In recent days three of New Zealand's four major banks have reported profits in excess of $1 billion, with ANZ, New Zealand's largest bank, reporting a profit of virtually $2b.

Observers of the banking system have questioned why New Zealand's banks are more profitable than their Australian owners in proportion to the amount of capital invested.

Adrian Orr has questioned whether New Zealand banks are so highly profitable because of a failure to invest in their own systems.

At the release of the much awaited report on bank conduct and behaviour, which identified that banks often had little structure in place to identify misconduct or deal with the wider risks when it was found, Adrian Orr, the governor of the central bank, made pointed comments about why New Zealand's banks are so profitable.

* ANZ makes almost $2b from New Zealand banking

* Westpac adds to bank earnings with $1b haul

* BNZ announces $1b profit**

'Our banks are highly profitable,' Orr said, suggesting New Zealand's banks were more profitable than many international peers.

'They have one of the world's lowest cost to income ratios, which we have to question,' Orr said.

'And we're here saying, have you invested sufficiently in things that are important to the long term sustainability of your business.

'That is across risk systems, it is across conduct frameworks, and I know at the Reserve Bank we've been talking to them for a long time about core systems and standalone capability.

Start of closer oversight

Prime Minister Jacinda Ardern told reporters that the Government wanted a 'fairer' banking system.

'Banks do need to lift their game and be better at identifying problems and risks early on and fixing them.'

The Government would await the final report and also the release of the Australian Royal Commission into financial services for what could be learned from that.

'Today's report is not the end of the line on the issue, in some ways it is the beginning of closer oversight and scrutiny.

'Banks should remember that it is a privilege, not a right, to operate, and customers needs must come first.'

'Name and shame'

The headline directive to banks are around changes to product sales, with the banks given just over a year to remove sales incentives pressuring staff into selling products like personal loans, credit cards and insurance.

Those which do not, will have to convince regulators they have systems in place to effectively prevent mis-selling of financial products and services to customers.

However at Monday's press conference, Orr admitted that he did not have the power to compel the banks to remove the incentives.

Orr told reporters that the bank had the power to investigate banks and demand changes where the Reserve Bank believed a bank was being reckless.

'We have powers of investigation, but powers of enforcement to get rid of it, no,' Orr said.

'I am very much of the position that banks will not be incentivised to try and play unusual games around this.'

Financial Markets Authority chief executive Rob Everett said there was the option to name banks which were dragging their feet.

'If by March we're hearing back from the banks that they're not willing to consider making changes to their sales incentives, then our intention would be to report on where that overall dynamic sits, and let banks take the public consequences of doing that.'