Reserve Bank rules 'a drag on competitiveness' TSB, Kiwibank, SBS and Co-op Bank tell watchdog

Thursday, 21 September 2023

TSB, Kiwibank, SBS and Cooperative Bank say regulation is hindering their ability to compete with the big four Australian banks.

Smaller, locally-owned challenger banks have teamed up to call for changes to make it easier for them to compete with the big Australian-owned banks.

Following mounting public anger at high bank profits and rising mortgage rates, the Government ordered the commission to conduct a probe into competition in retail banking to match the one it conducted into supermarkets last year.

On Thursday, the Commerce Commission published submissions made on its preliminary issues paper for its market study into competition in the retail banking sector.

TSB, Kiwibank, SBS and The Cooperative Bank’s joint submission to the commission saying Reserve Bank Te Pūtea Matua rules were making it hard for them to compete with the big four “domestic systemically important banks”.

Meanwhile, big Australian-owned banks sent submissions to the commission backed by reports commissioned to demonstrate they did not make excessive profits.

Moves by the Reserve Bank to strengthen the bank sector following the global financial crisis had improved the resilience of the overall financial system, the four challenger banks said.

Commerce Commission probe into retail banking competition

But Reserve Bank capital rules favoured the big banks, they said.

They said when a household refinanced their mortgage with a smaller bank from one of the big banks, the riskiness of the loan was “deemed to have increased by 45% despite there being no change in its risk profile”.

“The additional capital to support that loan is a drag on competitiveness for the smaller banks,” they said.

Facing constant regulatory change imposed higher proportional costs on smaller banks, and made it harder for smaller banks to innovate.

“Over the past 10 years, the financial services sector has faced an unprecedented number of ‘once in a generation’ regulatory changes,” the four challenger banks said.

They highlighted 2021 changes to responsible lending rules, which made it more difficult for people with mortgages to refinance at other banks, dampening competition.

The four banks also called for national-level services that could boost competition.

That could include a national identity service, which would remove the need for each bank to verify a customers’ identity and make it easier for customers to switch banks, or shared infrastructure and co-ordination in relation to managing and preventing fraud across all banks.

The more established banks, which accounted for 85% to 90% of the market, enjoyed “the benefits of a large inert customer base that they have built up over many years making it harder for smaller and newer banks to attract customers”, the four smaller banks said.

“We believe there is more opportunity to support and promote easier bank switching at an industry level in addition to any focus by individual competitors by looking at international examples, such as Pay.UK and their Current Account Switch Service (Cass),” they said.

“In 2022, Cass switched over 900,000 accounts, with a total of 8.8 million switches made since the launch of the service in 2013.”

Several anonymous submitters sent personal views to the commission.

“As someone who has attempted to open a new bank account with TSB and Cooperative banks recently I can report the process to do so is a barrier to competition in itself as switching to a new bank is a time-consuming, intrusive and arduous process,” one wrote.

The Commerce Commission should look at competition-promoting schemes in the United Kingdom, Kiwibank, SBS, TSB and The Cooperative Bank said.

“One is easily resigned to staying with the current banking provider. No wonder that banks in NZ are so profitable.”

ASB commissioned Nera Economic Consulting, which said: “The preliminary observation that the New Zealand banking sector appears to have persistently high profitability compared to banking sectors in international peer countries is likely to be overstated.”

ANZ commissioned Incenta Economic Consultants, which said: “The Commission’s analysis does not provide evidence to support its preliminary view that ‘the New Zealand banking sector appears to have persistently high profitability compared to banking sectors in international peer countries’.”

“Our analysis shows that ANZ’s average post-tax return on equity (12.3%) over the 2010 to 2021 period was ‘normal’ and was “materially the same” as the average post-tax returns (12.2 per cent) of its peer group of international banks when compared on a like-for-like basis.”