Reserve Bank gets a mauling at ComCom banking conference

Wednesday, 15 May 2024

The Reserve Bank Te Pūtea Matua got a mauling at the Commerce Commission’s retail banking market study conference, accused of stifling competition to the big four Australian banks.

On Monday, speakers at the conference accused the Reserve Bank of making it too hard for smaller banks and non-bank deposit-takers to emerge as forces to challenge the big four Australian banks.

In its draft report on competition in the banking sector published in March, the commission included a recommendation that the Reserve Bank apply a “competition lens” to its work.

But speakers said had not been happening at the Reserve Bank, and it was claimed the central bank’s policies were one of the reasons so few challengers to the banking sector’s big four oligopoly had emerged.

The Reserve Bank did not have representatives at the conference in Auckland to defend its policies, though the conference continues on Tuesday.

Shane Marsh, co-founder of digital banking start-up Dosh, said: “We are concerned about the impact on New Zealand of having no new entrants. The last new entrant of note was Kiwibank, and they were government-backed.”

“For us, the major barrier to entry is the Reserve Bank’s $30 million capital requirement to operate as a bank in New Zealand,” he said.

“We don’t have $30m, and we don’t believe we should have to have $30m to register as a bank,” Marsh said.

In the UK, the capital requirement is £1m (NZ$2.09m), he said. In Australia its A$15m (NZ$16.4m).

He said that had seen those countries get “neobanks” with the emergence of Up Bank in Australia with 1 million customers, and Monzo in the UK with 9 million customers.

The neobanks brought in innovation and better value, forcing incumbent banks to have to follow suit, he said.

Banking expert Simon Jensen said that since the non-bank deposit taking rules were brought in after the global financial crisis (GFC) there had been no new non-bank deposit-takers launched in New Zealand.

The GFC contributed to the failure of a number of non-bank deposit-taking finance companies, though some had failed before it struck in 2007 and 2008, leading to the taxpayer having to bail some depositors out.

The Reserve Bank did not like to have to consider competition when creating policy, Jensen said.

“The Reserve Bank hates dual mandates”, he said.

He gave the example of Covid pandemic measures that supported registered banks, but while excluding many non-bank deposit-takers, including the Funding for Lending programme, the Business Finance Guarantee Scheme, and exemptions from the Credit Contracts and Consumer Finance Act lending laws.

“The Reserve Bank were quite open with me that ‘this is all about financial stability, and it’s helping the big banks through Covid. We accept that there will be rough justice in what we are doing’,” Jensen said.

He was also critical of the Reserve Bank being able to decide independently on its capital requirements for banks, which he said were tougher than was imposed in other countries.

Daniel McGrath, chief executive of non-bank deposit-taker and lender Xceda told the conference that Australia was a country that had fostered a competitive non-bank sector by making deliberate decisions not to disadvantage non-banks when regulating them.

“Do we want to see a challenger bank emerge,” McGrath asked.

Social investment consultant Kent Duston said: “In the space of about 20 years the barriers to entry to new banks arriving in the New Zealand market have got significantly higher.”

He said the Reserve Bank claimed its vision for the financial system was that it was inclusive, trusted and resilient, while also being efficient and competitive.

“There’s no evidence at all that the Reserve Bank pays the slightest attention to efficiency and competition,” Duston said.

“The country is not being well-served by an organisation that’s materially increased the barriers to entry to the banking market,” he said.

Martin Taylor, principal from Digital Strategies, said: “It’s not a case of having stability, and failing on competition.”

“Before the 1989 Reserve Bank Act, and changes around that, the Reserve Bank inherited a very diverse market in which no bank had failed, and in its approach to regulation, it’s created four banks that are so big they are putting our entire economy at risk.”

Several speakers saw the emergence of the “too big to fail” banks, partly the fault of the Commerce Commission allowing ANZ to buy National Bank in 2003, as being responsible for tougher Reserve Bank capital requirements, which were harder for smaller deposit-takers to cope with.

Taylor and Duston both wanted to see sweeping banking reforms, including only allowing banks to be either wholesale clearing banks, providing services to other banks, or retail banks, providing services to households and businesses.

Duston argued that would mean there were no longer any banks that were too big to fail, and free up the smaller banks to compete without the Reserve Bank having to worry about any having become so large their failure would threaten the economy.

Several speakers wanted the Reserve Bank to advocate for law change to end the ban on non-banks that provided banking services from calling themselves banks, or say they are providing banking services.

“We are not allowed to use the word bank, or say what we are providing is banking,” he said.

Despite Dosh providing savings accounts, loans and payments, and will soon offer home loans in a partnership with Avanti Finance, claiming Dosh provided banking services could land him with a 12-month jail term, Marsh said.

Jensen said: “It’s always struck me as nuts that someone who is providing banking services can’t call themselves a bank.”