Banking dominance under scrutiny: New Zealand's battle for fair finance

New Zealand's Finance Minister Nicola Willis announced on Wednesday that the country will initiate an inquiry to evaluate competition within its banking sector, particularly focusing on services in rural areas. This move follows a draft report released in March by the national competition watchdog, which indicated that the four major banks in New Zealand offer limited competition in personal banking. The report pointed out that these banks prioritise profit margins, leading to insufficient investment in technology and low levels of innovation.

The four dominant banks in New Zealand— ANZ Bank New Zealand, ASB Bank, Bank of New Zealand, and Westpac New Zealand are all subsidiaries of Australia's major banks. These institutions collectively control about 85 per cent of mortgage and other lending, as well as approximately 90 per cent of deposits. "Promoting robust competition in the banking sector is vital to rebuilding the economy," Willis emphasised.

The inquiry will be overseen by Parliament's finance and expenditure committee, which will collaborate with an agriculture-focused committee to define the scope and produce a report on rural banking. Willis highlighted the importance of enhancing the rural economy for New Zealand's broader economic recovery, noting that farmers' satisfaction with banking services has declined in recent years. The finance committee plans to gather submissions from banks and may summon senior bank executives to provide testimony. According to a central bank report from the previous year, the agricultural sector accounts for 11 per cent of the country's bank loans.

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Here's a timeline highlighting the sequence of events leading up to the New Zealand government's decision to investigate the banking sector due to concerns over competition and high profits.

November 2022

Prime Minister Jacinda Ardern raised concerns about banks taking huge profits as the cost of living crisis grows. She questioned whether banks were demonstrating a commitment to their communities and suggested that lenders reflect on their behaviour.

May 2023

Prime Minister Chris Hipkins reiterated the government's concerns about the high level of bank profits, continuing the stance taken by his predecessor.

June 2023

June 20:

Government Announcement: The New Zealand government officially announced an inquiry into the banking sector due to concerns over excessive profits.

Finance Minister Grant Robertson: In Wellington, Robertson stated that the Cabinet had agreed to a market study to evaluate competition in the banking sector. This study, to be conducted by the Commerce Commission, is expected to be completed by August 2024.

Context: This decision came amidst rising public concerns over living costs and less than four months before the general election scheduled for October 14, 2023.

Robertson's Statement: He emphasised that the inquiry aimed to address long-standing concerns about the banking market's effectiveness for New Zealanders, especially those struggling with the increasing cost of living.

Bank Profits: Robertson pointed out that the top four banks, all subsidiaries of major Australian banks, held about 90 per cent of deposits and had consistently reported high profits over several years.

Industry Earnings: According to KPMG, bank earnings rose 17 per cent to NZ$7.2 billion in 2022, with the four largest lenders generating profits exceeding NZ$6.4 billion.

August 2023

Commerce Minister Duncan Webb: Announced that a preliminary issues paper was expected to be released. This paper will describe the banking industry's structure and provide early insights into the nature of competition.

Additional Information:

Ease Concerns: Bank executives maintained that the New Zealand market was already highly competitive and anticipated that the inquiry would help clarify and alleviate public concerns.

ANZ New Zealand CEO Antonia Watson: Stated that the competition study was an opportunity to provide clarity in a complex area and hoped it would boost public confidence in the banking sector.

Focus of Inquiry: The inquiry would focus on competition issues, such as barriers to new market entrants, the introduction of innovative products and services, and consumer switching capabilities, rather than on bank conduct and culture.

Previous Investigations: A 2018 investigation by the Financial Markets Authority and Reserve Bank, prompted by an Australian Royal Commission that revealed unethical behaviour by lenders, had already led to measures to protect consumers.

As the inquiry progresses, it aims to address the root causes of limited competition and high profits in New Zealand's banking sector, particularly focusing on enhancing services in rural areas and promoting economic recovery. With stakeholders engaged and a comprehensive evaluation underway, the government seeks to foster a more competitive and consumer-centric banking environment that better serves the needs of all New Zealanders.