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The New Zealand Banking Inquiry: A Chance to Build a Stronger Financial Future
New Zealand’s banking system is under the spotlight as the government investigates whether it’s truly serving the needs of the country’s economy. This inquiry, led by the Finance and Expenditure Committee, is digging into big questions about competition in the banking sector. Did you know that just four Australian-owned banks—ANZ, ASB, BNZ, and Westpac—control 85% of New Zealand’s lending market? That’s a lot of power in a few hands! The inquiry is also looking at whether the focus of our banks’ lending is helping or hindering our long-term growth.
Are We Too Focused on Housing?
Here’s a surprising fact: over 70% of the money banks lend out is tied up in home loans. Compare that to just 28% going to businesses, farms, and other institutional sectors. Ten years ago, that number was 42%. This shift shows that banks are playing it safe, putting more money into housing—a less risky option—and leaving businesses with fewer resources to grow.
Now, of course, stable housing markets are important. But when so much of the money available for lending is tied up in property, there’s less left for supporting businesses, innovation, and exports—the things that drive real economic progress. Instead, we’re stuck in a cycle where economic growth leans too heavily on rising house prices rather than productive investment.
What’s Behind This Imbalance?
Part of the problem lies in how our banking rules are set up. The Reserve Bank requires banks to hold more capital for business loans than for home loans. This means it’s easier and cheaper for banks to lend money for houses. It’s a well-meaning policy designed to keep our financial system stable, but it’s had some unintended consequences. Businesses—especially small and medium-sized ones—are finding it harder to access affordable loans.
Another issue is a cultural shift in banking. Banks have become more cautious and focused on compliance. This means fewer bankers are willing to take the time to understand complex business lending, opting instead for simpler, lower-risk home loans. While this might seem safer, it’s not great for building a dynamic economy.
What’s the Cost of Doing Nothing?
If we don’t fix these issues, we’re risking the future of our economy. Productivity growth in New Zealand has been crawling along at just 0.2% a year over the last decade, compared to 1.4% in the two decades before that. One reason for this slowdown is that businesses can’t get the credit they need to expand, innovate, and thrive.
The lack of competition in our banking sector doesn’t help either. Our big banks make huge profits—far above their international peers. And because they face little pressure to compete, they’re not taking many risks. While playing it safe might sound like a good idea, it’s holding back innovation and shutting out smaller players who could shake things up.
Turning Challenges into Opportunities
Despite these challenges, this inquiry is a rare chance to rethink how our banking system works. It’s an opportunity to bring in meaningful reforms that balance stability with innovation.
One idea is to encourage new financial solutions, like securitised SME loans. This could make it cheaper for smaller banks and non-bank lenders to support businesses. Another is open banking, which could bring more competition by letting fintech companies offer banking services. Adjusting the rules around capital requirements could also help make business lending more appealing to banks.
At the same time, we need to change the culture within banks. Relationship-based banking—where bankers take the time to understand the unique needs of businesses—could make a big difference. This kind of shift needs to start at the top, with leadership setting the tone for a more balanced approach to risk.
Looking Ahead
As this inquiry unfolds, New Zealand has a real chance to build a banking system that works better for everyone. By addressing the current imbalances, we can create a system that not only supports housing but also fuels businesses, innovation, and exports.
A balanced banking system is key to a strong, sustainable economy. By taking thoughtful, data-driven steps, we can ensure that businesses have the support they need to grow. This is a moment for bold ideas and collaboration between policymakers, banks, and the wider community.
The future is bright if we get this right. Together, we can create a financial system that not only keeps us safe but also helps us thrive—an economy where businesses can innovate, communities can grow, and all Kiwis can benefit. Let’s seize this opportunity to build a better, fairer banking system for New Zealand.
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