The Finance and Expenditure Committee resumed its banking inquiry this week, with Committee members wanting to hear again from bank chiefs. The Committee is looking for answers about banking competition. But it risks missing a bigger issue: How the Reserve Bank’s heavy-handed regulation increases borrowing costs for every New Zealander. 

A new submission to the Committee from banking experts Andrew Body and Simon Jensen provides fresh evidence of these costs. Their analysis shows the Reserve Bank’s capital rules add between 0.25 and 0.375 percentage points to mortgage rates compared with Australia. For a million-dollar mortgage, that means between $2,500 and $3,750 in extra annual interest payments.  

The Reserve Bank requires banks to hold enough capital to survive a one-in-200-year financial crisis. No other country sets such an extreme standard. Most aim for resilience against a one-in-100-year event. 

Making matters worse, the Reserve Bank keeps adding requirements to its conservative settings. Banks must now conduct climate-related stress tests and meet complex reporting obligations, even though the high capital requirements already protect against such risks. 

The central bank also requires banks to hold more capital against farm lending than Australian regulators. A New Zealand farmer faces higher borrowing costs than an Australian farmer, even though both sell into the same global markets. 

These rules might make sense if they protected against real risks. But our banking system proved resilient through the global financial crisis and the pandemic. Bank losses remained low even during the dairy downturn of 2015. 

The Reserve Bank’s ultra-conservative approach comes at a high price. Using the Australian Productivity Commission’s economic model, Body and Jensen estimate the impact on New Zealand’s GDP as high as $8.8 billion annually - about 2.1% of GDP. That is equivalent to the cost of several major hospitals each year. 

As the Initiative has long argued, Parliament could fix this problem. We need expert oversight of the Bank’s prudential regulatory function. The Reserve Bank Act should be amended to make efficiency a primary objective alongside financial stability. The Minister of Finance needs the power to direct the Bank to align its capital rules with international standards. 

The Select Committee has a vital role to play. Rather than focus only on bank competition, it should examine how the Reserve Bank’s rules affect the cost of credit. Getting these settings right matters. 

New Zealand needs a stable banking system, but not at any cost. The current regime imposes a needless tax on economic activity. Both consumers and businesses pay the price.