Positive Money’s submission to the Commerce Commission market study on banking is now available on the Commerce Commission website, along with 36 other submissions.
A second submission was presented with our feedback following the Commerce Commission’s conference in Auckland 13–15 May 2024.
Our main point is that the answer to competition is more banks, not bigger banks. To this end, our submission centred on three issues.
First, we supported the Commerce Commission’s recommendation that Kiwibank play a central role promoting competition in the banking market, but we make the point that its role as disruptor will be best achieved by supporting small banks and new entrants, rather than taking on the ‘oligopoly’ of big banks head on. As we noted in our submission:
[Kiwibank’s] role is not to scale up and compete on a “business as usual” basis so that it can join the ranks of the biggest banks. This is unlikely to lead to long term competitive pressure. It will simply mean that five banks share 90 per cent of the market instead of four.
Kiwibank will be most effective as a disruptor if it is used to support small banks and new entrants with services and regulatory support to address the scale, technology and entry barriers they face.
Secondly, we supported the Commission’s view that the Reserve Bank should change its regulatory settings to give more weight to competition rather than its present emphasis almost solely on risk. Our view:
[The Reserve Bank’s] legislative mandates, their interpretation and implementation have contributed to weak market competition and will continue to work against competition if they are not addressed.
However, we disagreed with the Commission’s proposal that the Reserve Bank adjust its prudential settings to achieve ʻcompetitive neutrality’. Positive Money believes that it should go much further in supporting competition. In the short to medium term, prudential settings such as capital requirements, need to tilt the playing field positively in favour of smaller banks and new entrants. As our submission notes:
Competitive neutrality of capital settings will not contribute adequately to competition in a market where the [too-big-to-fail] banks’ oligopoly is supported by a suite of competitive advantages.
In this light, it is disappointing that the Reserve Bank’s own submission comes out in support of the status quo. This is unacceptable.
The Reserve Bank will have another opportunity to promote competition with the implementation of the new Deposit Takers Act with its deposit insurance scheme. Positive Money proposes that deposit insurance coverage and terms be set in a way that goes beyond ‘competitive neutrality’ to positively favour smaller banks and new entrants.
This will help to offset the advantage the big four banks get from an implicit Government guarantee, courtesy of their ‘too-big-to-fail’ status—especially important in unsettled times when that very ‘guarantee’ can lead customers to shift deposits away from otherwise-safe small banks.
Finally, in our response to the Commission’s request for recommendations in areas that they may not have considered, we proposed that the Commission consider the separation of the big banks’ retail from their corporate and wholesale banking activities.
We believe that the Commission should consider the separation of retail banking from other activities in our “too-big-to-fail” (D-SIB) banks. They should be separated to service two distinct markets with different needs:
- Retail banking—for consumers and small businesses, offering payment services, savings, mortgages and small business banking – the subject of this market study
- Corporate and wholesale banking for corporations, institutions and investors with more sophisticated needs – most of the areas that fall outside this market study
These two distinct areas of banking can be separately regulated in ways suited to each sector’s needs, competitive environment and with a banking culture to match.
A range of approaches can be considered, from operational separation to breakups.
The clearer distinction between the different types of banking will further encourage retail competition by improving the regulatory environment and reducing the scale advantages of the D-SIBs.
You can read more about separation and other proposals in Positive Money’s discussion document, Reimagining Banking: An alternative banking future for New Zealand, and how we get there, where we background the changes that led to our current banking market, and propose a path for reform that once again sees the flourishing of smaller banks such as regional, community and Iwi banks, as well as new digital banking services. We welcome your feedback and suggestions to develop it further.
Our second submission following the Commerce Commission conference
The Commerce Commission held a conference in Auckland 13–15 May 2024 to receive feedback on the draft report which Positive Money attended. We provided a further submission with our feedback from the conference.
In summary, we left the conference with a mixture of hope and concern. Hope popped up in many places among the attendees, including from the big banks whose ideas, on occasion, were surprisingly constructive. Concern came as we saw that the Reserve Bank was the only key player not represented, a further sign of its reluctance to engage or change despite being at the centre of some of the most severe competition problems.
To this end, our key follow-up recommendation was a joint Commerce Commission and RBNZ process to review retail banking regulation. We do not believe that the Reserve Bank alone, with its current skill set, culture, and priorities, will achieve the right balance between financial stability and competition.
We also asked the Commission to add retail separation to its recommendations. This would split the big banks’ retail and corporate/institutional sides, either through so-called ring-fencing (a form of operational separation) or an actual break-up similar to the way Telecom was split into Chorus (wholesale) and Spark (retail) to improve competition.