Proposed terms of reference say bank account number portability must be enforced with urgency, and ex-ministers like John Key shouldn't go straight onto bank boards.
Competition campaigner Tex Edwards has reinforced calls for a Commerce Commission market study into banks, saying New Zealand's mortgage margins are four times the OECD benchmark.
The entrepreneur, who founded 2 Degrees to break up the telco duopoly, has been vocal in the past two years' inquiries into anti-competitive behaviour by supermarkets and building supplies companies.
Now, his two-man competition lobby group MonopolyWatch has taken the unusual step of proposing draft terms of reference for the Commerce Commission.
READ MORE: * Reserve Bank would back a Commerce Commission probe into bank profits * Commerce Commission warned as big credit card firms resist crackdown. * Taxing banks' excessive profits – be careful what you wish for
The action is in response to Reserve Bank chief economist Paul Conway backing a Commerce Commission probe into bank profits.
In a Newsroom interview this week, Conway reiterated concerns that banks are quick to hike mortgage lending interest rates, but slow to raise deposit interest rates. "I think the banking sector would be an appropriate focus for a market study, should the Government wish to go there," he said.
"Given the disproportionate financial, legal, political, social and commercial forces that the sector can bring to bear, the Commission will need all the support it can muster ... It will be a battle between David and Goliath. We’re helping gather the stones for David’s slingshot." – Tex Edwards, MonopolyWatch
Market studies are a new tool that the Government has directed the Commerce Commission to use three times: to investigate petrol prices, supermarkets and currently, building supplies.
This is the first time the Reserve Bank, which is statutorily tasked with regulating banks, has stepped in so explicitly. It's been warning of "profiteering" in some sectors during the cost of living crisis and in the aftermath of Cyclone Gabrielle, and singled out the widening gap between mortgage and term deposit rates.
But this is not the first call for a probe into bank profitability. In November, then Prime Minister Jacinda Ardern said bank profits were unjustifiable. She was responding to Westpac's announcement of a 2022 after-tax profit of $1.16 billion, an increase of 12 percent on the previous year, and ANZ's $2.3 billion, up 20 percent. "I think questions need to be asked to managers of these banks as to whether or not they are serving their communities well," she said.
NZ banks' net interest margins widen
On the other side of the Tasman, Australian Prime Minister Anthony Albanese this week called on the country’s big banks (the parent companies to New Zealand's biggest banks) to boost deposit rates for savers, amid concerns rate hikes were only being passed on in full for borrowers.
It's not the influence of serving politicians that piques Edwards' interest, though – it's the former politicians who are quickly appointed to the banks' boards of directors.
John Key joined the board of New Zealand's biggest bank ANZ in October 2017, just 10 months after resigning as Prime Minister and seven months after leaving Parliament.
He wasn't the first and, unless Edwards gets his way, he's unlikely to be the last. Former National leader Don Brash gave his Parliamentary valedictory in December 2006, then joined the ANZ National Bank board in May 2007. He's now chair of the New Zealand arm of the Industrial and Commercial Bank of China.
Former Prime Minister Jim Bolger left Parliament in April 1998 and was appointed Kiwibank chairman in May 2001. Former justice minister Simon Power left Parliament at the November 2011 election, and took an executive role at Westpac two months later. He was eventually promoted to acting chief executive in 2021, taking that seat on the board.
MonopolyWatch's draft terms of reference raise the question of whether banking lobbyists should be regulated. "Should there be a three-year stand down period before Cabinet ministers become bank directors in line with OECD best practice?"
"A key area of focus could be whether there are barriers preventing smaller market participants from expanding their market share and entering a broader range of market segments." – Emma Ihaia, Castalia
The draft terms of reference reflect the views of economists, spoken to by Newsroom, that the first question of a Commerce Commission market study should be what barriers there are to new players entering the New Zealand banking market.
Competition economist Emma Ihaia, at economic consultancy Castalia, points to the extent to which New Zealand's bank market is concentrated with four or five big banks. "An enduring high level of market concentration as well as concerns around profitability levels make the banking sector a good candidate for a market study," she says.
"A key area of focus could be whether there are barriers preventing smaller market participants from expanding their market share and entering a broader range of market segments."
This would involve looking at whether there are structural constraints, whether regulatory requirements are making entry and expansion harder than necessary, and whether there are strategic barriers. "How easy or difficult is it to switch between banking service providers?"
She says the Commerce Commission should compare with other countries – for example, whether New Zealanders are benefiting from the same range of product offerings and innovation that is occurring overseas, and how margins compare internationally.
NZ Initiative chief economist Dr Eric Crampton says the combination of barriers to entry and regulatory measures like the Credit Contracts and Consumer Finance Act may have had substantial detrimental effects on competition.
Tex Edwards says a market study would show whether competition in the banking industry is benefiting New Zealand consumers over the long term.
Quarterly bank profits before tax
“We mean no disrespect to the Commission by publishing these proposed terms of reference,” he says. “We have taken this unusual step for three reasons. First, we believe that the banking sector has for long enjoyed excessive profits at the expense of ordinary New Zealanders and has proven resistant to competitive pressures.
“Secondly, the study is only the first stage in what will be a long and bitter and contested struggle. Because sector inequities continue to affect the lives and physical and mental wellbeing of everyday New Zealanders, the study needs to be initiated with urgency: this is an attempt to help it gather some initial momentum.
“Thirdly given the disproportionate financial, legal, political, social and commercial forces that the sector can bring to bear, the commission will need all the support it can muster ... It will be a battle between David and Goliath. We’re helping gather the stones for David’s slingshot.”
Commerce Minister Dr Duncan Webb says no decisions have yet been made about the focus of the next market study. "However, I am focused on using the tool to ensure markets operate fairly for consumers," he tells Newsroom. "I am particularly interested in improving markets where the greatest long term gains can be made for ordinary New Zealanders."
