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Understanding financial system efficiency in New Zealand

Chris Bloor, Chris Hunt

This article examines the concept of financial system efficiency in the New Zealand context. The primary function of the financial system is to facilitate the allocation of society’s scarce resources, both across the economic system and over time, in an environment of inherent uncertainty. If the financial system performs this role well, then it will be contributing to economic growth and prosperity in a positive way. The article develops a conceptual framework for evaluating financial system efficiency and applies this to the New Zealand financial system. In particular, we focus on whether the high return on equity enjoyed by the New Zealand banking system, relative to other jurisdictions, is indicative of a banking system that is any less competitive and efficient than elsewhere. Our research to date suggests these high relative returns can be explained by a number of factors including relatively high cost of capital in New Zealand and the implicit support the major banks receive from their Australian parents.