Barriers to Banking

I like the new Commerce Commission draft market study into retail banking. Instead of spending a pile of time trying to estimate whether the note on the sidewalk is a $20 or a $50, it looks at what's blocking anybody from picking up any notes that might happen to be there.

And it finds a whole pile of regulatory barriers preventing smaller banks from expanding and new banks from entering. 

The Reserve Bank lets large banks run leaner capitalisation, disadvantaging smaller ones. The large banks had access to the Reserve Bank's Funding for Lending Program; small ones didn't. The overall regulatory burden is huge, but a huge regulatory burden disproportionately hurts small players who can't spread the cost across a larger depositor base. Constantly changing CCCFA rules particularly hurt smaller players. AML rules increase switching costs and help entrench those with already-large depositor bases. 

My column over at Newsroom this week ($ today, ungates tomorrow) goes through some of it. 

A snippet:

None of this should be a surprise. The Reserve Bank’s prudential framework has not considered the effects of its rules on competition. Neither has it been required to give regard to competition. 

The draft report also points to a promising change. The Deposit Takers Act, which introduces deposit insurance, requires the Reserve Bank to take account of “the need to maintain competition within the deposit-taking sector” as one of several objectives. It’s a start. The draft report urges it to go further, recognising that existing levels of competition are not ideal. It warns that the depositor compensation scheme that will back deposit insurance could too easily set levies that have anti-competitive effects.

The Commerce Commission really should be commended for this report. Its draft report on supermarkets spent enormous time and effort trying to estimate supermarkets’ cost of capital and profitability. However, it seemed not to have occurred to the commission, in its draft report on retail grocery, that high profits should encourage new entrants wanting a slice of high profits. The final report turned to those barriers to entry.

This time, its draft report spent less time agonising over precisely how profitable the banks may be and more time on the barriers that may stop existing or new rivals from competing those profits away while benefiting consumers.

The sharper focus meant the commission could come to practical recommendations around regulatory barriers that the Government could ease to reduce large incumbents’ advantages over others.

As the coalition agreement between National and Act requires the commission’s future market studies to maintain this focus, the draft report into banking is also a promising sign for studies yet to come.

Rather than try to guess whether there are $20 or $50 notes on the sidewalk, it is far better to check whether policy and regulation have made it impossible for anyone to pick them up.