Reserve Bank tells Commerce Commission to stay in its lane, refuses to bend regulations to improve bank competition

The Reserve Bank thinks open banking and financial literacy would do more to improve competition among banks than changing bank capital rules. Photo / NZME

The Reserve Bank (RBNZ) is very publicly telling the Commerce Commission to stay in its lane when it comes to the way banks are regulated.

The commission, which is doing a market study of personal banking, believes banks would be more competitive if the RBNZ changed the way it decided how much capital they need to hold to prevent them from collapsing.

However, the RBNZ reckons changing the rules would compromise the stability of the financial system.

It isn’t having a bar of the competition watchdog’s advice, highlighting its opposition by proactively publishing a submission it prepared for the commission alongside a press release.

“We disagree with the commission’s analysis regarding our prudential capital settings and the recommendation for us to re-review them,” RBNZ deputy governor Christian Hawkesby said.

“The current bank capital framework is the result of a careful and extensive review process that occurred recently and is still being phased in.

“The review included consideration of competition and resulted in several changes to support levelling the playing field between large and small banks, while preserving the risk sensitivity of capital requirements.”

The RBNZ’s capital rules are still being phased in. They’ll be fully implemented in 2028 - more than 10 years after the RBNZ started consulting on making the change.

The RBNZ’s approach saw many in the banking sector effectively go to war with the regulator before Covid-19 hit.

They argued the RBNZ was overdoing it, requiring them to fork out billions to withstand an Armageddon-level crisis.

Nonetheless, the RBNZ stuck to its guns, much like it’s doing in the face of criticism from the Commerce Commission.

“The commission’s suggested changes to our risk-weighting framework in the draft report would lead to very marginal benefits to competition, and could have unintended consequences and put us out of step with international regulatory approaches,” Hawkesby said.

He talked up parts of the commission’s report that don’t directly affect what the RBNZ does, saying it should put more emphasis on making changes that would result in more disruption and innovation among the big banks and across the industry as a whole.

“Combined, initiatives like open banking, easier switching and multi-banking, and improved financial literacy are likely to be mutually reinforcing,” Hawkesby said.

“Easier switching and multi-banking will make it easier for consumers to move to providers offering innovations through more open banking.

“But these issues are complex and will require clear leadership, direction and prioritisation from government and industry, and resourcing to deliver. We are keen to be part of these efforts.”

Hawkesby also noted the RBNZ’s commitment to considering competition in its decision-making going forward.

For example, it will apply a new “proportionality framework” to the way it regulates banks, finance companies, building societies and credit unions under the Deposit Takers Act 2023.

The Commerce Commission will publish its final report on its market study into banking before August 20.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.