Government to beef up Kiwibank to shake up ‘cosy’ bank sector

Tuesday, 20 August 2024

Nicola Willis responds to Commerce Commission banking market study

The Government will beef up Kiwibank to increase competition in the banking industry.

Finance Minister Nicola Willis said bank competition currently resembled a cosy pillow fight “with profit margins coming first and everyday Kiwis coming second“ and she wanted Kiwibank to be a “disruptor”.

Willis said the plan was to raise additional capital for the bank, which could come from KiwiSaver funds, New Zealand investment funds “and investment from everyday New Zealanders”.

“I'd love to see ACC, instead of investing in overseas financial services, thinking ‘well, actually, we can make money out of investing in Kiwibank’.”

Treasury would engage with Kiwibank’s holding company, Kiwi Group Capital, on the options for raising the new capital, which could be available to the bank from 2026, after the bank had upgraded its IT systems, she said.

Finance Minister Nicola Willis has asked the Treasury to explore options for beefing-up Kiwibank and expects to take a plan to the Cabinet by the end of the year.

The announcement followed the release of the Commerce Commission’s final report into the banking sector on Tuesday.

The commission said greater competition from a beefed-up Kiwibank and private investment in “open banking” services could help bring about more competition in the banking industry.

Willis said the Commerce Commission study had “proven what’s been long suspected: New Zealand’s banking sector is uncompetitive, and Kiwis are not being well served by a highly profitable, two-tier oligopoly”.

“Today’s report calls out the market behaviour of New Zealand’s big four banks: they are highly profitable compared with international peers, they lack innovation and do not aggressively compete for customers,” Willis said.

“I share the vision of a stronger more disruptive Kiwibank.”

The Commerce Commission expects open banking to be “a game changer” improving bank competition, but believes a stronger Kiwibank could have a quicker impact.

Commerce Minister Andrew Bayly, who has been involved in shaping the Government’s response to the commission’s market study, would not comment on the amount of extra capital the bank might need to provide its beefed-up competition role.

Despite the search for extra capital, Willis said she envisaged the Government retaining a majority interest in Kiwibank “well into the future”.

“I want a path forward that sees Kiwibank grow while remaining New Zealand's bank.

“We envisage it growing in the business banking area, potentially in the home loan area and in other services. Ultimately, that will be for Kiwibank to decide,’’

A better-funded Kiiwibank would benefit not only its customers, but those of other banks, Willis said.

“If we remove that capital constraint and allow Kiwibank to really go for the growth that's out there … it would knock the big four banks out of their complacency because, quite frankly, at the moment, they've got a cosy little arrangement.”

Commerce Commission chairperson John Small has made clear it sees open banking as the bigger, longer term hope for improved bank competition.

In addition to finding ways to expand Kiwibank, the Government would act on all the other 13 recommendations made by the competition watchdog’s market study into banking, Willis said.

These include measures to accelerate “open banking” and to provide bank customers with more information to compare and switch banking services.

Commerce Commission chairperson John Small said open banking could be “a game-changer” for bank competition.

It allows new entrants to provide alternative services to the banks but often relies on their co-operation in providing access to IT systems and customer information.

Progress on open banking had been far too slow, Small said.

The banking industry and the Government should commit to ensuring open banking was fully operational by June 2026, he said.

The Reserve Bank had previously disagreed with the commission’s suggestion its prudential capital settings should be “re-reviewed” with competition outcomes in mind.

The commission also said the Reserve Bank should place more focus on “reducing barriers to entry and expansion in the banking sector” and make sure its regulations did not unintentionally favour large banks.

Reserve Bank governor Adrian Orr pushed back very strongly against earlier suggestions from the commission that it should make the goal of increasing competition a major factor when it sets regulations for the sector.

But Willis appeared to side with the commission, saying “we're promoting financial stability at the cost of competition” and that she would write a “letter of expectations” to the Reserve Bank.

The Commerce Commission had found the Reserve Bank oversaw “a very strict and conservative prudential supervision regime”, Willis said.

“It's conservative by international standards and the report concludes it needs to put greater emphasis on competition. I agree,” she said.

“The Reserve Bank and its policies and actions should support a more competitive banking sector.”

The Reserve Bank said it “strongly supported” the Commerce Commission’s recommendations on open banking and “noted” it recommended the Reserve Bank placed a greater emphasis on competition in upcoming decisions.

“We are considering the report’s findings, as well as the Government’s initial response,” deputy governor Christian Hawkesby said.

Chairperson Neil Quigley said it welcomed the Finance Minister’s review of its Financial Policy Remit, despite the bank previously making clear it did not believe its prudential capital settings needed to be “re-reviewed”.

“The remit is an important tool for the minister to specify matters the Government considers the Reserve Bank should have regard to in achieving its financial stability objective and performing its functions as a prudential regulator and supervisor,” he said.