Banks in New Zealand are feeling the effects of regulatory creep. Financial institutions are concerned that the “green shoots” of growth will be cut short by more regulatory reform. Counterparts in Australia have aired similar concerns. Does regulatory compliance always hamper growth? Or are the concerns of NZ banks related more to a growing culture of compliance?
A perception of over-zealous regulation is a key theme in the auditing firm’s latest Financial Institutions Performance Survey, released today.
The survey found collective bank profits rose 8.6 per cent in 2013, with a 1 per cent return on assets almost recovering to pre-financial crisis levels.
That was driven by a combination of margin retention, cheaper funding costs, and internal cost-cutting, as well as better quality loans.
For the fourth year in a row, expenses for bad loans fell, this time by 23 per cent.
KPMG head of financial services John Kensington said in the report there were “strong, green shoots” emerging.
“Shielding these green shoots from the frost of regulatory reform is likely a challenge for 2014.”
Regulations seemed to have become the major bugbear of every bank, banker and customer.
“An urgent plea was either specifically or implicitly made by every person we spoke to.”
KPMG questioned whether it was better to be an earlier adopter of new regulation, or a “fast follower” to allow others to work through the teething troubles.
There was “a very real fear” that regulators were forging ahead in an attempt to become market leaders, and were no longer listening.
Consultations had felt like consultation in name only, with decisions already made, KPMG found.
Reserve Bank deputy governor Grant Spencer, who contributed a section to the report, said there was a shift toward active supervision. The Reserve Bank is responsible for licensing and regulating banks.
That included more targeted meetings with bank directors and senior management, increased stress-testing, and reporting of data.
However, Spencer pointed out the central bank had no intention of undertaking “on-site supervision”, as practiced by most overseas regulators.
“Responsibilities for the activities of each bank ultimately reside with its directors, not the regulator,” he said.
New Zealand Bankers’ Association chief executive Kirk Hope said international trends had influenced many of the reforms, and would continue to do so.
While appropriate consumer protection was important, the likes of the new responsible lending bill had imposed expensive systems changes, he said.
The other main theme of the KPMG report was the intense competition throughout 2013, which was expected to continue this year:
“Competition in the industry has been cut-throat: the big Australian banks flush with cash have been relentless in their pursuit of lending targets.”
Constant undercutting of rates and incentives such as free iPads, TVs, or legal cost contributions were now common tools for wooing borrowers.
Actively poaching customers was also growing, through sharper rates and offers to pay break fees, KPMG said.
Kensington said the LVR restrictions meant there would be spirited competition “for anyone who’s a good loan, be it a household mortgage or a corporate”.
Two new banks were included in the KPMG survey for the first time, the local branch of the Industrial and Commercial Bank of China and fledgling lender Heartland.
– © Fairfax NZ News