RBNZ rules "a drag on competitiveness" – four challenger banks

Smaller banks propose changes to the competition watchdog

RBNZ rules "a drag on competitiveness" – four challenger banks

Four challenger banks have lodged a joint submission to the Commerce Commission, to call for changes that would make it easier for them to compete with the larger Australia-owned big banks.

The Commerce Commission was tasked by the government to conduct a market study into competition in the retail banking sector, in response to growing public anger over high bank profits and surging mortgage rates.

Just last week, the Commerce Commission published the submissions lodged in its preliminary issues paper for the banking market study.

In their joint submission, TSB, Kiwibank, SBS, and Cooperative Bank blamed Reserve Bank rules for making it tougher for them to compete with the big four domestic systemically important banks, Stuff reported.

The big Australian-owned banks, too, made submissions to the commission, where they used commissioned reports to show that they did not make excessive profits.

But according to the smaller, locally owned banks, the Reserve Bank has improved the resilience of the overall financial system, in the wake of the global financial crisis, but they claim the central bank’s capital rules favoured the big banks.

They said when a mortgage holder switches lenders from a big bank to a smaller bank, the risk 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,” the smaller banks said.

Smaller banks also find it harder to innovate due to constant regulatory change that imposes higher proportional costs on them.

“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. The 2021 changes to responsible lending rules, for instance, made it tougher for home loan borrowers to refinance at other banks, dampening competition, it was suggested.

The four banks also proposed boosting competition by introducing national-level services. This includes a national identity service that would scrap the need for each bank to verify a customer’s identity, making it easier for then to switch lenders. Another is 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, reaped “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 told the competition watchdog.

“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.”

The commission also received personal views from several anonymous submitters.

“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. “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 said the initial observation that the NZ banking sector “appears to have persistently high profitability compared to banking sectors in international peer countries is likely to be overstated.”

This sentiment was echoed by ANZ-commissioned Incenta Economic Consultants, which said there was no evidence to back the commission’s preliminary view, Stuff reported.

“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%) of its peer group of international banks when compared on a like-for-like basis,” it said.

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