Big bank profits the price for stability, Bollard says

Friday 28th September 2012 1 Comment

New Zealand's big four Australian-owned banks earn more out of the nation than banks in most other countries, but that's the price that must be paid for a sound financial system, according to former Reserve Bank governor Alan Bollard.

Regulation of the big four banks - ANZ National Bank, Bank of New Zealand, Westpac Banking, and ASB Bank - has improved during Bollard's decade-long tenure, and lenders have been efficient and dynamic, he said in an interview for the Reserve Bank Bulletin. Still, he questioned why the banks continued to post earnings that are "large by most standards."

"Banks are learning to live with lower returns, although they are still higher than in most other banking systems," Bollard said.

"Banking is an industry you want to be sound so you might be well prepared to live with a degree of allocative inefficiency - part of which may arise from an implicit subsidy of the system by the government - provided what you are getting in return is soundness and guarantees of soundness, which I think we are getting," he said.

According to Reserve Bank data, the big four locally incorporated banks' aggregate net profit was $2.78 billion in the 2011 financial year, the most since they collectively made $3.02 billion in 2008, before the global financial crisis set in.

Bollard said the dominance of the big four created some barriers to entry to New Zealand's banking industry, around the need for a new player to have an economy of scale to access foreign funding.

"It will be interesting to see how institutions like Kiwibank attempt to overcome these barriers, but I'm not sure there is a strong case for regulatory intervention," he said.

Earlier this year, KPMG's annual Financial Institutions Performance Survey found lenders' interest margins improved slightly over 2011 to an average 2.2 percent, compared with 2.09 percent in 2010, while the ratio of after-tax profit to total average tangible assets rose to 0.86 percent, from 0.74 percent.

Bollard officially finished his term earlier this week, replaced by former World Bank executive Graeme Wheeler.

BusinessDesk.co.nz

Comments from our readers

On 28 September 2012 at 2:46 pm Charlie said:

How does the use of volatile sources of funding to acquire illiquid real estate assets promote stability?