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Letter to NZ Herald Editor on banking competition

The following letter to the Editor by Reserve Bank Governor Adrian Orr will be published in the New Zealand Herald on Saturday 25 May 2024.

Dear Editor,

In response to the Opinion piece authored by the NZ Initiative Chair, published 23 May.

The author lays blame for the lack of competition in the New Zealand banking sector at the feet of the Reserve Bank’s capital requirements and credit risk weights for retail banks. This is tired, misleading, and needs to be called out.

I am unsure what to be most concerned about: That the retail banks who are members of the NZ Initiative believe this? Or, they don’t, but are still willing to sponsor this?

The large four Australian-owned retail banks in New Zealand have for years posted the highest risk-adjusted returns on capital amongst their peers globally. They continue to do so even after the Reserve Bank’s insistence they hold more capital.

How could this be possible? These banks have consistently maintained or increased net interest margins markedly above their Australian parent’s margins. These banks must have pricing power beyond what would be observed in a competitive market. In large part, their low cost-to-income ratios, relative to their New Zealand competitors, affords them market dominance. Not capital levels or risk weights.

Competition will only be enhanced by enabling and empowering discerning customers through more choice and innovation. For example, by ‘open banking’ and improved access to retail banking systems.

The New Zealand Council of Financial Regulators discuss this on its website. The Reserve Bank also explains these facts in our submission to the Commerce Commission, and our internationally peer-reviewed retail bank capital decisions papers – all available on our website.

Yes, the latter includes robust cost-benefit analysis.

Adrian Orr

Governor Reserve Bank of New Zealand | Te Pūtea Matua

More information

What I want for New Zealand’s financial system |

Submission on draft Commerce Commission market study

Capital Review