Wednesday, 25 April 2018

Banking Conduct & Competition

In the same week that the NZ Initiative hopped into the Reserve Bank's regulatory governance model, news about dodgy conduct by banks in Australia prompted Adrian Orr, the new Governor of the RBNZ to assure New Zealanders that our banks are "infinitely" better behaved than their Australian parent companies. Pretty strong word, infinitely. Especially for someone whose phrasing nuances can move markets.

It certainly raised my antennae and I'm not the only one. Bloomberg used another quite strong word in reporting the Governor's view: hubris. Meanwhile, Shamubeel argued that the burden of proof should now lie with the banks to prove they're not dodgy. In the same article, all our Aussie-owned banks said they're very different animals to their parents, barely even the same species. Significantly, all but one cited our different regulatory regime.

Which raises a pretty interesting question: is our regulatory regime (combined with other relevant features of our market) a contributor to much better conduct or a cover that obscures much the same conduct? On the basis of this recent reporting, we simply can tell.

I'd have thought the Governor would have research to back up his claim, but neither he nor the banks have cited any such research, so at this point its fair to assume that there is none.

The importance of this issue hardly needs pointing out. Banks made $5.2bn in profits from New Zealand last year and the vast majority of that took a one-way trip across the Tasman. Meanwhile, research by MBIE(pdf) suggests that over the period 2000-2010 finance and insurance was the least competitive of 10 sectors, and within that sector banking was the only industry to become less competitive.

I think we need more transparency here. Maybe the song being sung in harmony by the regulator and the regulatees is the real truth, but we need assurance that it's not just a doctrinal hymn of praise to the market.

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