The Government had another go yesterday at trying to force more competition into a sector of the economy.
The proposals to encourage Costco to set up more supermarkets by allowing them to access the fast track planning process and then to simplify the passage through the regulatory jungle for other prospective overseas new entrants may go only so far.
Perhaps as a consequence that is why Finance Minister Nicola Willis has floated the commissioning of a cost-benefit analysis on breaking up the existing supermarket duopoly of Foodstuffs and Woolworths.
How Foodstuff’s new director, the former Finance Minister Steven Joyce, might react to a forced breakup is anybody’s guess.
But what specialist advice to the Finance and Expenditure Select Committee on banking shows is that forcing existing companies to become more competitive is easier said than done.
And maybe the ultimate message to Willis is “be careful what you wish for”.
The focus on the banks and supermarkets has its origins in the 2023 election campaign when NZ First Leader Winston Peters accused National and Labour politicians of lacking the political will to take action, insisting that “it’s very likely that Ned Kelly is not behaving himself in New Zealand”.
And so the National-NZ First coalition agreement included two commitments on supermarkets and banks:
• To establish a select committee inquiry into banking competition with broad and deep criteria to focus on competitiveness, customer services, and profitability.
• Explore options to strengthen the powers of the Grocery Commissioner, to improve competitiveness, and to address the lack of a third entrant to remove the market power of a duopoly.
Thus, the Finance and Expenditure Select Committee reported last week on banking and Willis yesterday on supermarket competition.
Whether it is a consequence of the Committee’s report or not is unclear, but the Reserve Bank has echoed the Select Committee’s call for a review of the capital assets trading banks are required to hold against various types of loans that they make.
The Bank announced on Monday that it was conducting that review, and Willis welcomed it, saying that since 2019, there had been concerns that the Reserve Bank’s capital settings might be undermining competition and efficiency in our banking industry.
These settings risked increasing the cost of lending to New Zealanders, imposing excessive restrictions on lending to important sectors such as agriculture and community housing, and creating headwinds for economic growth.
But the independent advisor to the Select Committee, the former Reserve Bank economist and chair of the Productivity Commission, Murray Sherwin, confirmed to POLITIK yesterday that there could be a downside to changing the settings.
Simply, if the banks can free up more of their reserves and loan the money out rather than holding it as a reserve, their profits would likely go up.
Sherwin said that for the four big banks, the big driver of reduced returns on equity (RoE) over recent years had been the requirement to hold increasing amounts of equity.
Thus, the more equity they were required to hold, the lower their return on equity.
Bank’s lending assets were weighted according to their relative riskiness, he said.
Residential mortgages were low risk.
“It’s a highly liquid market, so if a homeowner does get into trouble servicing the mortgage, the banks can sell readily and get their money back,” he said.
“And it is a commoditised market; high turnover, standardised practices and systems, low cost to service.”
But farm and business lending was a more specialised business with higher service costs and much more sophisticated analysis required to judge which businesses to lend to and which to avoid.
“And it can be a lot trickier to unload the asset (business or farm) if the loan goes sour,” he said.
Thus, the asset values in each category (residential, farming, business) were weighted to reflect the risk.
That meant more equity was needed to support a farm or business loan than a residential mortgage of the same size.
“I don’t expect the equity requirements will fall as a result of the current review,” he said.
“There was an increase in equity requirements, which went ahead on 1 July, but the scheduled future increases will probably not proceed.
“Nor do I expect that the farming or business risk weightings will be reduced.
“Despite what the farmers say, the evidence from loan losses does not point to lower risk weights for farm lending.”
Sherwin told the Committee that over the past two or three decades, the big four banks had seen returns on equity slide from levels around 20 per cent to now around 12 per cent.
An important driver of that reduction had been regulatory requirements to hold more equity capital.
“Lower risk, lower returns,” he said.
Thus, the possibility exists that the profitability of the big four banks could rise if the assets they are required to hold are reduced.
Sherwin was also not so convinced that the banking market in which the big four operated was as cosy as some critics claimed.
“While the Commerce Commission does not observe consistent strong rivalry between the big four in the local personal banking market, it would be a mistake to conclude that the wider system is just a cosy cartel,” he said.
“We observe shifts in market share in particular markets.
“Kiwibank ‘s growing share of residential mortgages, Rabobank’s sharply increased share of rural lending, and the activity of international banks in the large commercial lending market are obvious examples.”
The Commerce Commission’s study of supermarkets was less precise.
It found that grocery prices “appeared” high by international standards and that the profitability of the major grocery retailers also “appeared” high.
Willis has been keen to persuade more companies to run supermarkets in New Zealand, but yesterday it seemed that only Costco had given an indication it might be interested.
In March, she had issued a Request for Information (RFI) to get proposals for new companies to enter the New Zealand market to shake up the current duopoly.
“I am seeking information from a range of potential investors on what it would take for one or more new grocery retailers to enter the market on a national scale or for existing competitors to grow to sufficient size to materially increase competition,” she said.
Apart from Costco who told her they could see opportunities for new stores to be built in New Zealand in the next few years, there appear to have been no other firm offers.
“It is disappointing that other major international retailers such as Aldi and Lidl opted not to take part in the initial RFI,” she said.
“It’s possible that the changes we are announcing today will encourage them to take a more serious look at New Zealand.”
All of this leaves the Government in a potentially awkward situation.
If the Reserve Bank makes only slight (or even no) adjustments to the capital asset ratios and if no takers can be found to build new supermarkets, then Willis will be left with nothing to show for her response to the cost-of-living crisis.
The Taxpayers’ Union – Curia poll for July shows “cost of living” as the single biggest political issue, well ahead of issues like health, employment and law and order.
Not surprisingly, the Opposition has taken to hammering the Government on it.
Willis is going to need answers, and so far, it seems she may be struggling to find them.
