Background
Building on the Commerce Commission Market Study into personal banking and the recent Finance and Expenditure Committee (FEC) inquiry, the purpose of the research was to better understand why, despite the high perceived profitability of the New Zealand banking market, we had not seen more entrants.
The report provides useful context for calibration of our capital settings as part of the capital review and our prudential policy making more generally, as well as for our longer-term strategic work on the future of banking in New Zealand.
The report provides some valuable insights into perceptions of the New Zealand banking market and the perceived barriers to entry and expansion, based on high level market analysis and qualitative interviews across 15 Australian banking and financial services providers.
Key messages
- The work highlights a perceived lack of scale and opportunity in the New Zealand market as the greatest barrier to entry, in light of the fixed costs of establishing banking operations. The size of the opportunity is particularly relevant when comparing international markets.
- While regulatory costs contribute to fixed costs, there was not a strong view that New Zealand is overly regulated. Similarly, while there was a perception that New Zealand capital requirements were higher than those in Australia, they were not identified as a primary barrier to entry.
- A robust regulatory regime was seen as a benefit by some, particularly those who had operated or actively considered New Zealand as a potential market. Those without direct experience with the New Zealand market identified regulatory uncertainty as a potential barrier.
- Absence of alignment of policy and regulation between New Zealand and Australia was also perceived as a barrier. This was not specific to New Zealand’s prudential regulations, covering broader policy settings, for example currency.
- Difficulty in accessing funding was noted by a number of institutions. Specifically, challenges in competing with incumbents for deposit funding, and the absence of alternatives such as a deep and mature securitisation market.
Other key insights include:
- Australia has a greater proportion of second-tier institutions than New Zealand, which includes digital banks that have grown rapidly in Australia in recent years.
- International wholesale bank coverage in New Zealand largely reflects the size and structure of the New Zealand economy, in other words, the scale of international trade and investment flows.
The report highlights several areas where interviewees thought the attractiveness of the New Zealand market could be improved. These include the development of funding markets to support lending, reducing the fixed costs of entry, broader harmonisation with Australia, and targeted outreach to address knowledge gaps about the New Zealand regulatory regime.
Conclusion
We will be considering these findings in more detail in 2026. It is important to note that suggestions for improving the attractiveness of the New Zealand market have not been supported by detailed cost benefit or feasibility analysis, which was beyond the scope of the work undertaken by EY. Some suggestions are outside the scope of the Reserve Bank’s mandate. Others are actively under consideration, for example, proposals to reduce minimum capital requirements as part of the Deposit Takers Act (DTA) standards development and possible enhancements to regulatory elements of New Zealand’s securitisation markets, which have been identified as part of the capital review.
We are engaging with the Council of Financial Regulators (CoFR) agencies - the Treasury, MBIE, the FMA, and the Commerce Commission - to discuss the findings of the report.
We have also shared the findings with our Australian counterparts. The Reserve Bank maintains a close working relationship with the Australian Prudential Regulation Authority (APRA), with a mutual commitment from both regulators to cooperate, coordinate, and align on areas of common interest, where appropriate.