Navigating the Tensions between Competition Watchdogs and Central Banks amidst Bank Profit Surges

Rising bank profits have been a cause for concern in New Zealand, with the Reserve Bank being urged to investigate whether they are a sign of anti-competitive conduct. However, as someone who closely follows the banking industry, I believe these calls are misplaced. While it is true that mortgage rates are expected to strain household budgets, it is also important to understand the Reserve Bank’s roles in the economy.

The Reserve Bank’s overarching goals are to fight inflation and ensure finaSettingility. It does this by running the country’s largest legal printing operation setting the official cash rate, and influencing banks’ expectations about future changes; it affects banks’ lending and deposit rates. Raising the official cash rate increases the cost of borrowing, which is one of the Reserve Bank’s principal tools for reducing inflation. However, higher interest rates can also increase bank profits. On the other hand, a low official cash rate can shrink profit margins by making it harder for banks to reduce the interest following deposits.

Before the 2008 Global Financial Crisis (GFC), deposit rates closely followed the official cash rate. However, during the same period, deposit interest rates continued to track higher than the official cash rate, and margins between lending and deposit rates fell significantly. When Covid-19 struck in early 2020, the official cash rate fell to historic lows, but deposit rates fell harder than lending rates, with banks’ lending margins jumping dramatically. This resulted in rising bank profits as demand for loans surged, and the banks’ need to offer competitive deposit rates was dampened due to the Reserve Bank’s support of cheap wholesale funding.

The Reserve Bank can make the entry of another competitor by setting and enforcing the rules on which entities can operate as banks. This is something that the Commerce Commission normally dislikes, as it reduces competition in the market. However, this is necessary to ensure financial sta-successfully prevented. Note that the Reserve Bank’s regulation of the banking sector has been successful in preventing financial meltdowns.

In conclusion, rising bank profits highlight tensions between competition watchdogs and central banks. However, it is important to understand the Reserve Bank’s roles in the economy and how its actions are necessary to ensure financial stability. While it is always important to monitor the banking sector for signs of anti-competitive behavior, it is also important to acknowledge the Reserve Bank’s role in maintaining the financial system’s stability.

Related Facts:

– The Commerce Commission is an independent Crown entity that enforces competition and consumer laws in New Zealand.
– The official cash rate is currently at a historic low of 0.25%.
– New Zealand’s property market has experienced significant growth in recent years, with house prices rising rapidly.

Key Takeaway:

– While rising bank profits have led to calls for investigation, it is important to understand the Reserve Bank’s roles in the economy.
– The Reserve Bank’s banking sector regulation is necessary to ensure financial stability, and its actions have successfully prevented financial meltdowns.
– Monitoring the banking sector for signs of anti-competitive behavior is always important.