Govt should use Kiwibank to undercut the big four

The people running the four big New Zealand banks - ANZ, ASB, BNZ, Westpac - will be breathing a very quiet sigh of relief. The $5 billion of annual profits they remit back to their Australian head offices are safe – for the time being.

The Reserve Bank/Financial Markets Authority Report released last week found no evidence of the systematic misconduct practiced by their parent companies in Australia. That's good, of course. The report does wag an admonitory finger at possible over-enthusiastic marketing of some financial products to retail customers.

It tells us the big four, with over 80 per cent of the New Zealand banking market, do differ amongst themselves in the quality and efficiency of their operations, but being polite New Zealanders, the authors of the RBNZ/FMA Report don't name names, so we, the retail punters, are none the wiser as to where to put our money.

However, differences in banks' efficiency could be a "smoking gun" for those looking for evidence that the banks' New Zealand profits are excessive. In a briskly competitive market, pressure on prices and profitability is such that sustained differences in efficiency between competitors can't be tolerated — laggards have to shape up or ship out. That's how we want our businesses to operate, not to settle into cosy oligopolies with high prices sheltering slack performers.

So, how do the numbers stack up? Is $5 billion in profits a lot of money, or no more than to be expected from such a large and important industry?

The big four's profits reported in Australia, net of the Kiwi contribution, are a bit more than five times New Zealand profits, whilst the Aussie economy is a bit more than six times the size of ours, in terms of GDP. This might imply a discrepancy of "just" a billion dollars or so, but, hey, as the late Senator Dirksen once said: "A billion dollars here, and a billion dollars there, and pretty soon it's adding up to some real money."

It's clearly true that we in New Zealand pay between 10 and 20 per cent more for our mortgages than do Australian customers of the same banks. But then those of us who are lenders not borrowers get about the same premium on term deposits.

The relevant point here is that, since we don't save enough to finance all our mortgage debt internally, the banks bring in cheaper funds from their Australian and other lenders, resulting in a wider spread (and profit margin) on the New Zealand mortgages.

It could reasonably be pointed out that not saving enough is our own fault. It could also be noted that, if you don't like making Australians rich, you can still switch to a locally-owned bank - the TSB or Kiwibank, for example. (Yes, I personally have done this). But only about 7 per cent of New Zealanders are now with Kiwibank, and about half this number with TSB.

Why such a limited response? It is true that you won't get a better deal with the smaller local banks, but at least the profits will stay in the country. Perhaps Kiwis just don't care about what they pay. But they should care - there is increasing evidence that uncompetitive pricing systematically reduces real incomes in this country.

Now, our current Government seems terrified about giving offence to "business", but what could the Government do anyway? They could buy back the banks, for vastly more than we got for them in the panicky, dogma-driven privatisations of the Rogernomics episode. But we would have to pay full market value for them now, there'd be no net gain to us.

There is, however, something we could do. We, the taxpayers, own Kiwibank. Our Government could gird its loins, stiffen its spine, take a deep breath, and instruct Kiwibank to act as what the private sector calls a "fighting brand" – with a mandate to be an aggressive price leader: undercutting the big four on mortgage rates, paying more on term deposits, squeezing their profit margins.

Sure, this would reduce Kiwibank's profits, but the payoff to our businesses and households could be much larger.Enabling legislation might be needed, just as it is needed now to relieve the nightmare of the Auckland Council being legally unable to instruct the wholly council-owned Port Company to not build hotels and car parking buildings on the waterfront, another legacy of the Rogernomics straitjacketing of public policy.

We do have an inspiring precedent for public action in the cause of lower prices. This is our government-run purchasing monopoly Pharmac, which over the past quarter century has indeed wiped billions of dollars of real money off the prices we pay international drug companies for their pharmaceuticals. Perhaps the fruits of more competitive banking won't be so easily plucked but why not find out?