By Dr Bryce Edwards

The corporate retail banks are making mega profits on the back of Government policies and indirect subsidies of recent years. As a result, there are calls from across almost the whole political spectrum for greater regulation of the banking sector, including windfall taxes. But will outrage turn into action?

Prime Minister Jacinda Ardern led the charge against the banks this week, warning the likes of ANZ – which announced recently that its profits were up 20 per cent to a record $2.3b – that they are at risk of losing their “social license” to operate here. The Prime Minister sounded tough, but she was also quick to admit that she has no intention of taking any action or changing the rules. The Finance Minister Grant Robertson was also fast to rule out any reforms or further investigations.

Critics have said that Ardern’s plea for the banks to have “self-reflection” is wishful thinking in the extreme. The Green Party’s finance spokesperson Julie Ann Genter put forward this analogy: “Expecting banks… to put people ahead of profit would be a bit like putting the fox in charge of the hen house.”

National, too, is pressuring the Government to act, with spokesperson Nicola Willis saying a full investigation needs to be launched into the banking sector, including whether government monetary policy had contributed to the mega profits.

Why won’t the Government act?

Claire Matthews, a banking expert at Massey University, has accused Ardern of grandstanding on the issue, suggesting that if Labour really thought the mega profits were a problem, they would be doing something about it. She suggests today that Ardern is just being an opportunist populist and electioneering: “People like to hate the banks so it’s quite an easy win for the Government.”

Looking at the lack of substance from Ardern on banking, one leftwing blogger wrote yesterday on Labour’s banking policy: “this is why Labour deserves to end up in opposition after the next election: they’re all noise and no policy. They’re offering us literally nothing, just the same tired, unjust status quo.”

Sam Stubbs, Chief Executive of KiwiSaver provider Simplicity, is reported today as saying: “The PM talks about the social license to operate. There seems to be quite a bit of hui but not much doey from the Government on bank reform.”

Stubbs is rather scathing about the dissonance between Ardern’s bank-bashing and her own governance of the banking sector: “These are nice sound bites but so far what the Government has done is slap the banking industry with a wet bus ticket all through the pre-Covid profit period when it was huge, all through the Australian banking inquiry. They then provided them with a massive amount of free money during Covid.”

The Government has handed the banks the mega profits

Stubbs’ critique of government subsidies of the banks is important. He says: “They have received a tremendous amount of tax-payer-funded support. How do they reward us? By making record profits when everyone else is doing it hard.”

Business journalist Bernard Hickey also argues that the big banks have essentially been subsidised by the taxpayer in recent years. Today he writes that “The big four banks got massive help to grow their lending & profits from the Govt in 2020, 2021 & 2022. They get their licenses to print money from the public.” He argues that mega bank profits have been made because of the Government’s “$55b of money printing, abandonment of LVR controls and $16.4b of subsidised lending by the Reserve Bank to banks through the Funding for Lending scheme”.

Hickey also explains that the banks have benefitted from a government guarantee of their sector: “the banks benefit from an implied and unfunded Government guarantee to protect them, especially now the Government is building a deposit guarantee scheme and especially after the Government’s actions during the Global Financial Crisis, when the Government created retail and wholesale deposit guarantees in 2008/09.”

Quite simply, banks have always been keen to privatise the profits from their role in the economy, but then socialise any losses – by getting the state to bail them out and to guarantee their operations.

New Zealand Herald business editor Liam Dann makes some similar arguments today: “Billions of dollars were pumped into the economy by Government and the Reserve Bank to save businesses and jobs and avoid a crisis. A side effect of the stimulus was a property and savings boom through 2020 and 2021. That’s now had the galling result that a sizeable chunk of that cash looks set to line the pockets of Aussie bank shareholders.” And he adds, “When things actually go wrong, taxpayers have to bail them out.”

Leftwing political commentator Gordon Campbell also points to Government policy as behind the mega bank profits: “The banks have reaped the rewards of the government’s successful efforts (e.g. the wage subsidy scheme) to keep the economy relatively buoyant during the pandemic. Not only did those government schemes and capital injections save the banks from suffering the bad debts and mortgage defaults that they’d expected. In addition, the Aussie-owned banks are also now in line to reap further profits from the Reserve Bank’s current efforts to curb the inflation that those initial Covid interventions inadvertently helped to generate. For months, the banks have been able to crank up their lending rates. They’ve also increased their profit margins. In sum, Covid has been something of a joy ride for the banks.”

All of this means that the banks are likely to have a combined profit total of $10b this year. Analysts point out that a 14 per cent rate of return is extremely high for banking, which is a low-risk activity normally expected to make more like half of that rate. Unusually, banks are making much greater profits and return on investments than the average NZX50 Index companies.

As Bernard Hickey points out, the local bank operations in New Zealand are “now more profitable than their parents and almost all their peers in other developed economies”. And according to Victoria University of Wellington’s banking analyst Martien Lubberink, the previous year’s profit announcements showed that the four big banks were making a profit of about $1,200 per New Zealander.

Actions the Government can take on banking

Four different reform areas are currently being proposed by analysts.

The first is a special tax on the current mega bank profits. A “windfall tax” has been proposed for some time, especially by those on the political left. The Greens took up this idea last month, pushing for a one-off tax on companies in super-profitable sectors such as supermarkets, electricity and banking.

Bernard Hickey advocates that Labour adopts the same tax used by the Australian government on banks, arguing today that this “would generate extra tax revenues of $2.6b a year, which would be enough to either pay for a tax cut or extra social spending, or to return the Budget to surplus sooner.” He says that the tax could be a levy of 0.06 per cent on the banks’ loans of $447b.

A second action would be to increase competition in the banking sector. At the moment the lack of competition in New Zealand means that mortgage rates are higher than they should be. Australians get a much better deal from their banks, because a more competitive market has been fostered there. Here, the four big banks are allowed to make a killing without any great attempts to make the playing field level and competitive.

One way to do this would be to invest significantly in the state-owned Kiwibank, which is currently far too small to compete properly. Some critics say that the Government is failing to properly fund the bank which means that it can’t properly compete with the Big Four Australian banks. It simply doesn’t have the assets and economies of scale to make any difference.

Sam Stubbs has argued today that the Government should scale up Kiwibank significantly: “Now the Government owns it yes it can recapitalise it. It would be profitable and the Government would still make money and you would get a serious competitor.”

Similarly, Liam Dann argues today that the best way to scale up Kiwibank would be “with mixed-model ownership in the style of the power companies – something this Government will never allow.” Dann suggests Kiwibank could be doubled in size.

The third action would be a full independent inquiry into the banking sector, as took place in Australia recently. Banking expert Claire Matthews, suggests that the Commerce Commission could also undertake a market study, as they did with the supermarkets and the building sectors. She argues that we simply don’t know how the banks currently operate and what problems there might be with the market and its regulation.

A fourth action would be to open up the banking sector by creating “open banking”, whereby customers can more freely shift between banks. This has occurred in plenty of other countries, and Labour has been accused of being far too slow to act on this.

For example, Stubbs is scathing on the lack of reform in this area: “Why aren’t they doing what everybody else has already done? They talk about open banking – they could have bought it in three or four years ago. We are still waiting for that. They could bring in number portability – we know what that has done for phones – they haven’t done that.” He suggests that the banks have successfully lobbied Labour to delay such reforms.

Liam Dann also comments on this today, explaining that “new blockchain-based tech that allows consumers to control all their banking data and switch providers more easily. In fact, New Zealand is dragging the chain on this initiative which has been adopted in the UK and opens the market to all sorts of new players to offer retail-facing banking services.”

Today, Newshub is reporting Government sources saying that “a mega shakeup” in terms of open banking is soon to be announced. While neither Labour nor the banks are commenting publicly, it’s reported that “Behind the scenes there’s now a scurry to get this out quickly to capitalise on the public outrage over the massive bank profits.”

The banking problem is going to get bigger

Although the Government seems more inclined to try and embarrass the banks into action rather than take a more interventionist or reforming approach, it won’t be enough. In fact, the political situation could get more embarrassing for the Government over the next year.

With rising interest rates bank profits are just going to get bigger. But at the same time, for homeowners these rising interest rates – together with mortgage holders going into negative equity with falling property prices – may result in defaults on mortgage payments. Banks may then have to increase their foreclosures. That’s going to reduce their social license to operate even further.

Banks would be wise to convince the public and politicians that they are “ethical capitalists”. If they can’t or won’t do that, then pressure will mount on the Labour Government to regulate. Government pleas to the banks to be kinder are unlikely to be enough to convince the public.

Increasingly voters are aware that Labour’s monetary policies of recent years led to increased super profits for the rich – including a transfer of about $1 trillion to asset owners. A reckoning might therefore be coming, and politicians will increasingly have to show which side they stand on: with the banks and the super-wealthy, or with the public.

By Dr Bryce Edwards from The Democracy Project under CC BY-ND 4.0.

Dr Bryce Edwards is Political Analyst in Residence at Victoria University of Wellington. He is the director of the Democracy Project.