This week's parliamentary bunfight over whether the big four banks should have passed on all the surprise cut in the Official Cash Rate has again thrown a spotlight on just how competitive our banking system is.
The banks argue that they fight tooth and nail for market share and don't co-operate to generate super-profits. At certain points over the last decade that has been true.
That was certainly the expectation - or at least the hope - of Bill English when Labour accused National of going soft on banks, and suggested they should be regulated.
"What the banks will listen to is customers shopping around," English said.
"That will have a great deal more influence on their behaviour than politicians making statements they cannot follow through on."
That was certainly the case from 2002-2010 when Kiwibank was on the warpath, pushing for market share using discounted mortgage rates and an aggressive approach to lending growth.
Kiwibank challenged the big four with the support of its Labour Government shareholder and happily went for growth, offering pricing that was better than its Australian-owned rivals.
That sort of growth required the Government, through New Zealand Post, to stump up fresh capital and forgo dividends.
It worked to squeeze the net interest margins for retail banks down by 74 basis points to a low of 1.98 per cent. Collectively, that cost the big four Australian-owned banks hundreds of millions in lost profits between 2002 and 2009.
But those heady days are long gone. NZ Post's deteriorating financial position and the Government's reluctance to stump up more capital has seen Kiwibank pull its head in to focus on becoming just as much of a profit and dividend machine as its rivals.
Last year it paid $46 million in dividends and is set to produce a profit this year of more than $127m.
What the banks will listen to is customers shopping around.
Since Kiwibank backed off, the banks have rediscovered ways to nudge their net interest margins back up to around 2.2 per cent.
Deposit rates have been cut more than mortgage rates and this week's collective move to pass on just 10-20 basis points of the Reserve Bank's rate drove the point home.
They justified this by pointing to increased funding costs on their foreign borrowings because of global financial turmoil. The other factor no doubt looming in the big banks' mirrors was significant losses coming from loans to dairy farmers.
The Reserve Bank said this week that stress tests done by the banks showed they could have to book dairy loan losses of up to $4 billion over the next four years in the worst-case scenario.
In effect, they are stocking up with extra profits from home mortgage loans to offset the coming losses from the dairy loans.
The ultimate irony is the banks have helped the Reserve Bank avoid the feared side effect of the rate cut of adding more fuel on the Auckland (and regional) property price fires.
A competitive banking sector is ultimately good for consumers, but in the short term a well-functioning oligopoly can help the Reserve Bank and Government achieve its aims.
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