National could expand bank market study

National won’t scrap the Commerce Commission’s market study into banking competitiveness and would wait for the final report before a possible further probe.

Friday, September 8th 2023, 9:39AM

by Sally Lindsay

The party’s commerce and consumer affairs spokesman Andrew Bayly says if National had ordered the study it would have included business banking.

“That is the one area we are particularly concerned about because a great deal of money has been moved out of the productive sector – farming, business, property development – and into less productive areas of the economy, particularly housing.”

Growth in business lending has been lower than a third of residential mortgage lending, he says.

Reserve Bank data shows while residential mortgage lending from banks has increased from about $60 billion in 2000 to $343b in 2023, bank business lending has risen from about $40b to $120b.

Bayly says it’s an issue because many small business owners offer their houses as security..

“Lending to businesses helps fuel the economy, and it is essential that these entities can access finance easily and in the most cost-effective way.”

Bayly says National cannot understand why the Government asked the Commerce Commission to focus on retail banking only.

The 14-month study’s focus is on deposit accounts and home loans including the nature of competition among the 27 registered banks.

The four largest – ANZ, BNZ, ASB, and Westpac – hold 88% of total assets of registered banks in New Zealand.

One of its biggest areas of investigation will be home loans and interest rates which have significant effects on household budgets. For 23% of households with home loans, repayments are significant. Overseas studies have identified home loans as being particularly profitable portfolios for banks. About 86% of home loans are provided by the four biggest banks and about $348 billion in lending is on mortgages.

The commission says it is also aware mortgage advisers play an important role in matching home loan providers with consumers, and intends to study their role and impact they may have on competition.

Another focus is the dynamic between interest rates charged for lending and those paid for deposits. Deposits accounted for about 62% of registered banks’ total funding.

Other matters to be considered are industry structure and the nature of competition; entry conditions for potential competitors and expansion; barriers to consumer comparison of bank offers or switching banks, including the extent to which products or services may be tied or bundled; impediments to new products or services; and comparative indicators of bank financial performance (including profitability).

Bank profitability will also come under the microscope. A June Cabinet paper says the profit returns of the big four banks in the past five years were above several international peers.

The commission will publish a draft report in March next year for consultation, with the final report – including any recommendations – published by the end of August.

Now the market study is underway, Bayly says National will await the outcome to see what it will do.

He’d be surprised if the study didn’t have something to say about the margin between what is paid on deposits and what borrowers are charged. “Even the Reserve Bank has highlighted it's quite variable at times and that's a key driver of profitability for the banks.

He says National doesn’t want to presuppose the findings, but says the Labour-ordered market studies into a number of sectors haven't really had much impact.

“The retail fuel industry and building products studies have not had any discernible benefits, although the commission is now talking to the fuel sector about anomalies in retail fuel pricing between cities and towns – and within individual centres – over the first year of monitoring under the new Fuel Industry Act regulatory regime.”

He says market studies are expensive and National wants to make sure they are tailored with a laser beam focus on the big issues.” We don’t want the commission doing wide ranging industry reviews just for the hell of it.”

Increased penalties need careful distinction

Meanwhile, the competition watchdog wants higher financial penalties to punish firms breaching the Fair Trading Act.

The commission believes existing fines aren’t a deterrent to companies making false and misleading representations to consumers.

Maximum financial penalties for companies are $600,000 per breach and for individuals $200,000.

Fines could instead be calculated as a percentage of revenue, as is done in Australia, the commission says.

Bayly says there would have to be a distinction between intentional deceit and the occasional mistake.

“If National leads the next Government we will take advice from the Commerce Commission, but it will be important to separate the transgressors from the company that makes an unintentional mistake.”

Tags: banks