More banking competition comes with risks

• Published date: 20 April 2024
• Publication title: Weekend Herald

The pinch is that achieving this will come at a cost, and potentially create a battle between the competition watchdog and banks’ prudential regulator — the Reserve Bank

The fixes the Commerce Commission recommended in its draft report on the sector, released last month, infer a bunch of trade-offs need to be made to weaken the dominance of the big four Australian-owned banks.

Its key recommendations include: changing the rules around how much capital banks need to hold to even the playing field between the big and small players, increasing Kiwibank’s access to capital to enable it to grow, and requiring banks to share their data with third parties — a process known as open banking.

The issue the Reserve Bank and Government will face, if they follow the recommendations, is they come with some downside risk.

Let’s look at the first point, which commission chairman John Small believes is the most salient — getting the Reserve Bank to change its bank capital rules, aimed at preventing banks from collapsing.

Bank capital rules

Banks and the Reserve Bank quite publicly went to war when consultation on updating the rules began in 2017.

The sector argued the Reserve Bank was overdoing it, requiring them to fork out billions to withstand an Armageddon-level crisis. The Reserve Bank dug its heels in and is still overseeing the phasing in of its tougher rules, which will fully take effect in 2028.

While it’s still reviewing the commission’s report, the Reserve Bank last month told the Herald it didn’t plan to change its capital rules.

The likelihood of the bank loosening its stance is slim. It only decided on the rules in 2019, then delayed their implementation due to Covid-19.

Reserve Bank governor Adrian Orr stood up to powerful bank chief executives. It’s unlikely he’s going to kowtow to the Commerce Commission.

One might argue it makes sense to let the bank capital issue be — if not in the name of making the financial system more resilient, then for the sake of sticking to a plan finally in motion.

However, there might be a chance of the Reserve Bank bending on a financial stability issue that isn’t yet set in stone — the design of its deposit compensation scheme.

Deposit insurance scheme

The scheme, set to go live next year, will see deposit-takers pay levies into a Government-backed fund that would be used to reimburse depositors up to $100,000, should their deposit-taker collapse.

Small banks and non-bank deposit-takers are worried the Reserve Bank wants to...