Banking inquiry reference terms laid out

Submissions are being taken by the finance and expenditure committee into the expanded inquiry, which comes after the Commerce Commission’s industry study into banking competitiveness. The commission is due to release its final report next week. 

As part of the coalition agreement between National and New Zealand First, the government is holding the select committee inquiry with broad and deep criteria to focus on competitiveness, customer services and profitability.

The committee will explore why banks’ favour mortgage lending over business and rural sector lending, return on capital from business, rural and residential mortgage lending and the level of interest rates charged to each sector.

The terms of reference are part of the committee’s ongoing efforts to ensure fair and competitive banking practices, Stuart Smith, committee chairman says.

The National MP says the government wants to ensure bank profits are justified and comparable to similar jurisdictions, particularly in rural banking, and if not, why not.

The inquiry aims to ensure New Zealanders have access to bank services at competitive prices and that regulations and settings imposed by regulators, such as the Reserve Bank, are not unduly influencing the cost of borrowing.

The inquiry also comes at a critical time for farmers who are facing tough conditions, especially after recent droughts and claims rural communities may be paying more than they should for banking services.

“We want to ensure that the capital requirements of banks are not causing the cost of borrowing to be higher than it needs to be. We also want to ensure that returns of equity in the rural banking sector are aligned with risk and are similar to other jurisdictions, Smith says.

The terms of reference for the inquiry include:

• The price of banking services, particularly business and rural lending products.
• Profitability, how it has changed over time and comparison to other OECD economies.
• The return on capital from business, rural and residential mortgage lending; the level of interest rates charged to each sector and why there has been a change in the proportion of lending to the productive sector relative to residential mortgage lending.
• The effect of bank lending policies relating to borrowers’ emissions that result in additional lending costs and/or lending restrictions.
• The level of customer “switching”, how this has changed and how this compares to other countries.

They also cover barriers preventing competition including:

• Limits on the growth of non-bank deposit takers.
• Restrictions on overseas investment/new entrants, including fintechs.
• Outstanding constraints on the use of technology and open banking.
• The role of Kiwibank as a competitor.

Terms also cover possible impacts of the regulatory environment on competition and efficient access to lending, including:

• Impacts on the allocation of bank lending by sector, such as business, rural and residential mortgages.
• The role of prudential regulation and its impacts on risk allocation, smaller banks and non-bank deposit takers (NBDTs).
• The role of bank regulators (FMA, MBIE, RBNZ) and whether the regulatory environment can be simplified.
• How and to what extent RBNZ capital requirements and credit risk models influence lending rates.
• Climate related disclosures.
• Whether the RBNZ’s focus on “financial stability” impedes the development of competitiveness, particularly amongst NBDTs and existing/potential fintechs.

Rural banking:

• How and to what extent the RBNZ’s capital requirements and credit risk models influence lending rates to agriculture and horticulture businesses.
• Whether the RBNZ’s approach to greenhouse gas emissions risk, including risk of government policy, has and is likely to result in further increases in lending rates to the agriculture and horticulture sectors.
• Whether bank environmental and sustainability policies have, or are likely to result in, further increases in lending rates to the agriculture and horticulture sectors.
• Whether there is adequate transparency on lending rates for rural, residential and business lending.
• Access to banking services, including cash services, especially in rural areas.

Lending to Māori asset-holders, organisations, businesses and individuals to:

• Ascertain the experience of Iwi (organisations and asset holders) and Māori (asset-holders and businesses) accessing banking products and services.
• Investigate whether banks are unreasonably resistant to accepting Māori land as collateral for borrowing.
• Investigate whether banks’ processes and procedures contribute to the Māori individuals and households having a disproportionately low rate of home ownership.

In each of these areas the committee should, where relevant, reference the findings of the Commerce Commission’s study into banking competition.

Finance minister Nicola Willis says the committee should seek evidence from financial market regulators including the Reserve Bank, Commerce Commission and Financial Markets Authority as well as banks operating in New Zealand, with the chief executives and chairpeople being made available for questioning.