Reserve Bank has given NZ ‘the stability of the graveyard’, banking inquiry told

Thursday, 20 February 2025

Parliament’s banking inquiry hears criticism that the Reserve Bank is too risk-averse.

Over-regulation is stifling growth, ensuring bank stability at the expense of a growing economy, banking law expert Simon Jensen has told Parliament’s banking inquiry.

Speaking to the Finance and Expenditure select committee on Wednesday, Jensen said over-regulation of banks was creating the “stability of the graveyard” in New Zealand.

The Reserve Bank Te Pūtea Matua had set its bank capital requirements to reduce the risk of a financial crisis to one in 200 years, which Jensen said was excessively conservative by international standards.

Jensen urged politicians to be the ones to make decisions about how risk-averse the country should be, rather than letting the Reserve Bank make that decision.

“Political decisions need to be taken by politicians, not regulators,” Jensen told MPs.

Jensen and investment banker John Body called for the Government’s financial policy remit for the Reserve Bank to align New Zealand’s risk appetite “with international standards at one in 100 years”.

Federated Farmers' Richard McIntyre gives MPs his recipe for getting farmers a better deal from banks.

They also called for an urgent review of what they called excessive laws and regulations which big banks could cope with, but were preventing competitors from emerging to challenge them.

However, the pair were not just calling for a regulations bonfire.

They said New Zealand needed a payments strategy set by politicians, a mandatory payments code covering bank liability for scam losses, a powerful banking code of practice, and a strengthened banking ombudsman scheme.

They also wanted politicians to introduce the right for everyone to have a “basic” bank account.

It was the second time the Reserve Bank came under fire at the banking inquiry on Wednesday, following a plea from Federated Farmers to politicians to “get [Governor] Adrian Orr to stop punishing rural New Zealand”.

“I’m not at all a bank-basher,” said John Body.

However, he said the big four Australian-owned banks ‒ ANZ, ASB, Westpac and BNZ ‒ were good at playing the cards they were dealt, and in New Zealand’s case that included their ability to better absorb the costs of excessive regulation than smaller rivals.

Simon Jensen (left) and Andrew Body told MPs on Wednesday that it should be politicians who set the country's risk appetite, not the Reserve Bank.

“One could reasonably form the view that they [big banks] like the regulatory regime they have,” Body told MPs.

In a written submission provided to MPs before the hearing, Jensen and Body said: “It is obvious from their returns on equity, the big four banks are using their market power to pass the cost of regulatory overreach and other inefficiencies back to customers.”

Smaller banks and non-banks could not do that as the cost of regulation fell proportionally more heavily on them, they said.

When compared with other countries’ banking sectors, New Zealand’s biggest four banks had an unusually high share of the market at around 90%, they said.

“Evidence shows that the big four banks have been able to achieve a return on equity which is high and stable by international standards and particularly high given their low-risk loan portfolios and low-risk operating environment with limited competition,” they said.

“From our review, it seems around 30% of their profits could be economic rents or super profits which, if correct, is a direct cost to New Zealand customers around $2b a year alone, without considering indirect costs.”

Reserve Bank capital requirements and other regulations had resulted in the big four banks lending less to businesses and more to households, becoming more like ‘savings and loans’ than ‘trading banks’, they said.

Small businesses and farmers were finding it increasingly hard to get finance, they said.

Deregulating and accepting more risk, not recapitalising Kiwibank, was the key to increasing banking competition, MPs were told.

Jensen said coping with regulation “soaked up” money that banks should have available to invest in IT to modernise their systems, and innovate.

Body called the plan to recapitalise Kiwibank a “distraction”.

Earlier in the hearing, the chief executives of non-bank deposit-takers like finance companies and building societies asked for “right-sizing” of regulations for smaller deposit-takers so they could better compete with the big banks.

Non-bank deposit takers also wanted to be allowed to be able to call themselves banks, and to have access to Reserve Bank-controlled systems that banks had access to, including the Exchange Settlement Account System, which would lower their cost of doing business.

Daniel McGrath, chief executive of Xceda Finance, said non-bank deposit takers like finance companies, credit unions and building societies made up just 1% of lending.

That was very low compared with other countries.