New Zealand Banking Review Sparks Debate Over Competition

The recent banking review in New Zealand has ignited discussions about the dominance of major banks and the need for increased competition. The government released its findings last week, addressing concerns about the substantial profits reported by top banks, including ANZ with $2.2 billion, ASB at $1.3 billion, BNZ with $1.5 billion, and Westpac at $1 billion in 2024. Critics argue that these profits stem from exploiting customers through high fees and inadequate service.

Approximately 90% of New Zealand’s banking system assets are controlled by these four banks, prompting calls for greater competition to benefit consumers. In response to public outcry, the government initiated a select committee investigation into banking competition and conducted a review of the rural banking sector. The report, released on March 15, 2024, received significant attention, although skeptics remain unconvinced.

The Reserve Bank has begun consultations on capital requirements for banks, but many findings from the committee echo previous reviews by the Commerce Commission. The commission had previously noted that the “Big Four” banks face limited competition in personal banking, leading to higher profitability compared to peers in other nations. Recommendations from the committee include a formal review of transaction account pricing by the Financial Markets Authority and lowering barriers for foreign banks to enter the New Zealand market.

While the idea of increased foreign bank presence raises concerns for some, the reality is that domestic competitors struggle to gather enough capital to challenge the established Australian-owned banks. Finance Minister Nicola Willis highlighted this issue when discussing Kiwibank, which is positioned between major banks and smaller lenders. Kiwibank may seek to raise an additional $500 million in capital, primarily from local institutional investors. Willis hinted that for Kiwibank to effectively rival the big four, foreign investment may be necessary.

The report also addressed rural banking issues, emphasizing the need for banks to clarify how they assess risk margins and pricing. Rural communities have expressed concerns that the closure of local branches has resulted in urban bankers making decisions without understanding their unique economic conditions. If implemented, these recommendations could alleviate some of these concerns.

Despite the report’s potential implications, its true impact will depend on whether the recommendations are acted upon or left to gather dust. The planned six-monthly updates from regulators and banks could provide a framework for ongoing monitoring. Additionally, the government has been asked to respond to all recommendations, including those not directed at it.

Ultimately, the report’s effectiveness in fostering competition and improving customer service will be determined by the reactions of bank customers across New Zealand.