Government Launches Broad Inquiry into Banking Competition

Highlights:

• Inquiry Focus: The government is launching a comprehensive inquiry into banking competition, examining the impact of Reserve Bank capital requirements on borrowing costs and market entry barriers.
• Rural Banking Concerns: The inquiry will scrutinize whether rural communities are facing higher borrowing costs and if current banking practices are justified, especially given recent economic challenges.
• Broad Scope: The investigation covers a wide range of issues, including regulatory impacts, the role of Kiwibank, and the influence of environmental and sustainability policies on lending rates.

Inquiry to Scrutinize Reserve Bank’s Role in Borrowing Costs

The New Zealand government has initiated an extensive inquiry into banking competition, aiming to address whether the Reserve Bank's capital requirements are unnecessarily inflating borrowing costs and hindering new entrants in the market. The finance and expenditure committee is now accepting submissions on the inquiry, which follows the Commerce Commission’s recent study into banking competitiveness. The final report from the Commission is expected next week.

Focus on Competitiveness, Customer Service, and Profitability

The inquiry stems from a coalition agreement between National and New Zealand First, with the goal of examining competitiveness, customer service, and profitability within the banking sector. The committee will investigate why banks prioritize mortgage lending over business and rural sector loans, assess the return on capital from different types of lending, and evaluate the interest rates charged to various sectors.

Committee chairman Stuart Smith emphasized the government's intention to ensure that bank profits are justified and comparable to similar economies, particularly in rural banking. He highlighted the need to understand whether the regulatory environment, including Reserve Bank policies, is adversely impacting borrowing costs and access to competitive banking services.

Key Areas of Investigation

The inquiry is particularly crucial for rural communities, who have faced challenging conditions, including recent droughts. Concerns have been raised that rural borrowers may be paying more than necessary for banking services. The committee will scrutinize the impact of Reserve Bank capital requirements on borrowing costs and whether these are aligned with the risks in rural banking, comparable to other jurisdictions.

Broad Scope Covering Regulation, Technology, and Rural Banking

The inquiry will also explore barriers to competition, including restrictions on non-bank deposit takers, overseas investment, and the growth of fintech companies. The role of Kiwibank as a competitor will be examined, along with potential impacts of the regulatory environment on competition and access to lending.

Additionally, the committee will assess the transparency of lending rates across rural, residential, and business sectors, and investigate whether environmental and sustainability policies are contributing to higher lending costs, particularly in agriculture and horticulture.

Finance Minister Nicola Willis has called for evidence from financial market regulators, including the Reserve Bank, Commerce Commission, and Financial Markets Authority, as well as testimony from the chief executives and chairpersons of banks operating in New Zealand. This inquiry represents a significant step towards ensuring a fair, competitive, and transparent banking sector for all New Zealanders.

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