Reserve Bank governor Adrian Orr hits back as row over capital rules resumes

Reserve Bank Governor Adrian Orr says bank capital is an "utter red herring" in the banking sector competition debate. Photo / Mark Mitchell

The Commerce Commission’s study on competition in the banking sector is reinvigorating the mudslinging seen before Covid, when the Reserve Bank (RBNZ) started looking at strengthening banks by making them hold more capital.

RBNZ governor Adrian Orr has taken aim at ANZ New Zealand chief executive Antonia Watson for partially attributing the bank’s high net interest margin, relative to its Australian parent, to the capital rules.

Speaking to the Herald a few weeks ago, Watson explained that because the cost of capital isn’t captured in the net interest margin, people should focus more on other measures of profitability, such as return on equity.

Banks went to war with the RBNZ ahead of it deciding on the capital rules in 2019, fearing the requirements would dent their profits.

Orr welcomed the opportunity to respond to Watson reinstigating the saga.

“It is an utter red herring, the capital story,” Orr told Newstalk ZB’s Mike Hosking on Thursday, making a similar comment to Parliament’s Finance and Expenditure Committee.

“A bank leader who believes that story – I’m not sure what is more dangerous, whether they actually believe it, or they don’t believe it and they’re just telling porkies.”

Orr claimed the capital rules weren’t denting banks’ returns on equity.

He said New Zealand banks continued to be profitable by international standards after 2021 when the rules’ seven-year phase-in period began.

At 14.5 per cent in the December quarter, ANZ’s return on equity was just below its six-year average (14.8 per cent), according the RBNZ’s banking dashboard, which goes back to 2018.

Its return on equity was also just below the 32-year New Zealand banking industry average of 14.9 per cent.

Industrywide, returns on equity were higher before the 2009 Global Financial Crisis.

Orr made the same point about banks still being highly profitable in a letter to the editor of the Herald, due to be published on Saturday.

He noted the big four Australian-owned banks – ANZ, ASB, BNZ and Westpac – “must have pricing power beyond what would be observed in a competitive market”.

“In large part, their low cost-to-income ratios, relative to their New Zealand competitors, affords them market dominance. Not capital levels or risk weights.”

Orr’s letter was written in response to an opinion piece by Roger Partridge, chair of the partially bank-funded think tank, The New Zealand Initiative.

The Commerce Commission’s draft report on the banking sector gave Partridge a way into discussing the rules, which he has long been a critic of.

Partridge reiterated how he feared bank customers were paying the price for heavy-handed rules in the form of higher borrowing and lower savings rates.

While Orr effectively said big banks’ customers, rather than their shareholders, were absorbing the costs, he stressed he wasn’t going to budge.

The RBNZ released a statement shortly after the commission released its draft report, saying it was sticking to its guns and believed open banking (data sharing), making it easier to switch banks, and improved financial literacy would enhance competition without compromising the stability of the financial system.

The commission, in its draft report, said it was concerned the capital rules were biting the smaller banks harder than the bigger ones.

It will deliver its final report 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.