Just before Christmas, the Reserve Bank announced that it had granted a banking licence to China Construction Bank, making that bank that 25th bank to hold a banking licence in this country, and the fourth Chinese bank to do so.
But the number is a bit misleading. China Construction Bank New Zealand Limited had had a banking licence since 2014. The new bank is simply the parent of the New Zealand subsidiary, now operating here as a branch as well as a subsidiary.
And that is not the only bank to operate in New Zealand as both a subsidiary of a foreign parent and as the foreign parent itself – ANZ Bank New Zealand Limited has a banking licence, and so also does the parent of that bank, the Australia and New Zealand Banking Group, based in Melbourne.
In total, five banking groups have two banking licences in New Zealand, meaning that there are just 20 distinct banking groups operating here.
Of those 20, just five are owned in New Zealand – Kiwibank, TSB, SBS Bank, Heartland Bank, and the Cooperative Bank, with Kiwibank being by far the largest of the five (indeed, with more assets than the other four New Zealand banks combined).
Reserve Bank data for the end of November show that the total assets of the New Zealand banking sector were $528 billion, while the total assets of the five New Zealand banks were just $39 billion at that date, or only some 7.4% of the total.
In other words, over 90% of New Zealand’s banking sector is controlled by foreign-owned banks. Many countries have banks operating in New Zealand – Australia, China, India, Japan, Korea, the Netherlands, the United Kingdom and the United States – but overwhelmingly the largest part of the foreign-owned sector is owned by the four big Australian-owned banks – the ANZ, the ASB (owned by the Commonwealth Bank of Australia), the BNZ (owned by the National Australia Bank) and Westpac.
When I was Governor of the Reserve Bank of New Zealand, I was often asked by foreign central bankers whether that high degree of foreign ownership worried me. It didn’t. I explained that what every country needs is a banking sector which is highly competitive, financially stable, and highly innovative, and we had a banking sector with all those characteristics.
But surely the banks are making too much money at the expense of ordinary New Zealanders? Well, it is certainly true that the big Australian-owned banks are, by international standards, quite profitable, and the banking sector as a whole has recently been making a 12-14% return on shareholders’ funds. That is good by international standards. The smaller banks, especially those which have recently been set up in New Zealand, are making well below that level.
Perhaps there is scope for the banks to cut their margins for the benefit of New Zealand borrowers? What will drive any reduction in margins is, of course, competition between the banks, but given that banks are on average making after-tax profit of just 1% on their assets, don’t assume there is much scope to cut what banks charge! They make a much higher return on their shareholders’ funds because, more than any other kind of business, banks are able to gear up their shareholders’ funds with borrowed money.
But who really controls these big banks? Those who ask that question, often with special emphasis on “controls”, strongly suspect that behind the friendly (or not-so-friendly) bank teller lurks some seriously sinister capitalist, and the Rothschild name sometimes gets mentioned.
The reality is much more mundane. All four of the big Aussie banks are publicly listed companies, and anybody is free to buy shares in them; many New Zealanders have done so, both directly and through managed funds like KiwiSaver.
Funnily enough, the current chief executive of the Commonwealth Bank (parent of the ASB) is a New Zealander, as was his predecessor; and as is the Chief Executive of the Australia and New Zealand Banking Group. The chief executive of the National Australia Bank (parent of the BNZ) was born in Melbourne, but got his degree at the University of Auckland and his first job was as an economist with an Auckland-based financial institution. So the banks which dominate the New Zealand banking scene have strong New Zealand representation at the highest level.
And above the owners of the banks sits the Reserve Bank of New Zealand. Nobody gets a banking licence in New Zealand without the approval of the Reserve Bank, and the Reserve Bank has to approve the appointment of every bank director, every bank chief executive, and every executive who reports directly to the chief executive. Personally, I think that degree of intrusion is unwise: it means that if something goes wrong, the Reserve Bank may well be held responsible, at least in the court of public opinion. But it is the reality, and the Reserve Bank backs up that involvement with the receipt of extremely detailed information on every aspect of a bank’s operations.
The Reserve Bank to a large degree determines the overall level of interest rates in the country, and has a major influence on both the structure of bank liabilities and on the level of mortgage lending (by establishing the minimum deposit borrowers must put down before they can borrow and by determining the so-called risk weights which banks must apply to different kinds of lending).
But who controls the Reserve Bank? The short answer is “the government”. The Reserve Bank is fully owned by the government, and the Minister of Finance appoints all the directors of the Bank, including the Governor.
So I don’t worry at all that a very high proportion of our banking sector is owned abroad. What banks can do is fundamentally determined by the Reserve Bank.
I worry much more about the fact that the ratio of household sector debt to household income has now reached nearly 170%, up from just 56% in early 1991 – and compared with an average ratio of household sector debt to income of 94% in the Euro area and 126% in the United Kingdom. That high level of debt was not caused by the banks so much as seriously flawed government policies – at central and local level – which have grossly inflated the housing market.
Declaration of interest: Don Brash was for several years a director of the ANZ Bank, and is currently chairman of the Industrial and Commercial Bank of China (New Zealand) Limited.
Copyright © 2024 Don Brash.