Where substantial economic power is involved, a failure to meet the public’s expectations of reasonable behaviour, as mediated through the government, will result in coercion.
The banking sector is already one of the most tightly regulated sectors in the economy and more regulation is coming down the line, most immediately:
- Climate risk reporting, in effect from the 2023 Financial Year (possibly to be followed within the next few years by nature-related and biodiversity reporting1); and
- Implementation of the Conduct of Financial Institutions (CoFI) licensing regime, expected in early 2025.
There are also other initiatives in play from the RBNZ which have the potential to promote a stronger sustainability and social inclusion focus among the banks. These include an issues paper2 to improve Māori access to capital and a proposal3 to entrench climate risk into the RBNZ’s supervisory framework (which could go so far as requiring that banks assign a greater risk weighting to non-green financing).
The banks are already active in the sustainable financing area and had the opportunity through the lockdown phases of the COVID strategy to demonstrate forbearance toward firms under pressure (assisted by the Business Finance Guarantee Scheme and the payment arrangements around tax debt offered by IRD).
However, a recessionary environment with rising interest rates and constrained government support is increasing customer distress.
As commercial enterprises with responsibilities toward their shareholders, their depositors, and the stability of the financial system, the banks will find it increasingly difficult to be lenient, particularly if their funding base is jeopardised – e.g. defaulting mortgage loans generally cannot be used to back securitisation or covered bond lending, and a worsening loan book will disadvantage depositor holders.
The banks are well aware that these commercial realities require a more nuanced stakeholder approach than previous cycles, with no abatement in the political response to news of record bank profits and negative customer experiences.
After the 2022 corporate financial reporting season, then Prime Minister Jacinda Ardern invited the banks to engage in some “self-reflection” about their profit-taking – a call that Finance Minister Grant Robertson and Prime Minister Chris Hipkins have thus far conspicuously failed to echo.
But the RBNZ Monetary Policy Committee and RBNZ Governor Adrian Orr have publicly called for the banks to lift their deposit rates to bring them in line with increases in wholesale and mortgage rates so that the benefits of the higher OCR flow through to savers, and incentivise saving.
And in early March National Deputy Leader and finance spokesperson Nicola Willis asked the finance and expenditure committee, of which she is a member, to open a “short, sharp” inquiry into retail banking regulation and competition. The idea was voted down by Labour, as she knew it would be.
But she has identified National with the case for reform so it seems likely, whatever the election result, that the retail banking sector will be subjected to a market study by the Commerce Commission.
Indeed, it has been on the candidate list from the outset but the retail fuel, supermarkets and building supplies industries were given priority because, in a low interest rate environment, they were bigger targets in terms of household budgets. Now that has changed with the RBNZ in tightening mode.
Market studies, although rarely a welcome event to the specimens under the microscope, notwithstanding the banks’ largely supportive response, offer the virtue of being disciplined, well-resourced processes where industry participants can make their arguments and have that evidence considered by an expert body.
1. Chapman Tripp commentary: Top ESG risks for boards and management in 2023
2. Reserve Bank Issues Paper: Improving Māori Access to Capital
3. Reserve Bank Issues Paper: Climate Changed 2021 and Beyond