Banks have cost borrowers $2b - Greens

Russel Norman. Photo / Mark Mitchell

Major bank price gouging on floating rate loans has cost New Zealand businesses and other borrowers up to $2 billion, Green Party co-leader Russel Norman claims.

Norman said yesterday that the recent banking inquiry held by the Greens, Labour and Progressive parties found New Zealand "does not have a competitive banking sector", and the resulting report recommends pouring more taxpayer funding into Kiwibank to transform it into a viable competitor to the Australian owned major banks.

The inquiry, instigated by Labour finance spokesman David Cunliffe, was initiated to follow up on Reserve Bank concerns that banks were not adequately passing through its rate cuts to floating rate loans, primarily those to businesses, during the depths of the recession.

However, the inquiry was widened to cover a range of concerns around the banking sector and monetary policy.

The inquiry found that an "unexplained remainder" of anywhere between 60 and 70 basis points out of a total of 575 basis points in Reserve Bank OCR cuts between mid-2008 and early this year were not passed on to borrowers.

"Even after allowing for legitimate interest cost increases faced by the banks which do not reflect in OCR changes, there still seems to have been a clear move to increase margins between the borrowing costs of the banks and short-term interest rates charged to customers," the report found.

Norman said 70 basis points of padding on major banks interest margins "represents an additional $2 billion in interest costs to the farm, business and home mortgage sectors".

However, Norman said the $2 billion estimate was an "annualised" figure. While he said he agreed with Norman's estimate, Cunliffe said it was based on evidence current at the point of time it was given.

"There will have been some changes since then ... so let's acknowledge that it's a snapshot."

Cunliffe said the report's conclusions of the report did not represent the policy of the three parties involved, although it was likely to influence them.

"I think there would be very broad support within Labour for the idea that Kiwibank should be expanded and it should be able to play an increasing role as a key competitor in the market."

However, Auckland University economics professor Tim Hazledine, who peer reviewed the report, cautioned against using Kiwibank as an instrument of government competition policy "either by pushing [cheap] funding onto it or by encouraging or requiring it to operate under other than a sustainably profitable commercial business model".