Introduction

New Zealand's banking sector is under scrutiny as Parliament launches a broad inquiry led by the Finance and Expenditure Select Committee. The investigation will delve into why banks prioritize housing lending over loans to the productive sector, such as agriculture and businesses. The Reserve Bank of New Zealand's (RBNZ) role is also in focus, with particular attention to how regulations and capital requirements may be influencing lending practices.

Scope of the Inquiry:

The inquiry’s primary objective is to ensure that bank services remain accessible and competitively priced for New Zealanders. With a strong focus on rural banking and the farming sector, the investigation aims to uncover whether these communities are unfairly charged higher rates. National MP Stuart Smith, chair of the committee, emphasizes the importance of understanding if bank profits are justified, particularly in comparison to similar economies. The inquiry is especially timely for farmers who face increasing financial pressures due to adverse conditions like recent droughts.

Key Areas of Focus:

Banking Competition and Pricing:
The inquiry will explore the competitive landscape within New Zealand’s banking sector, focusing on business and rural lending products. It will assess how profitability in banking has evolved and how it compares with other OECD nations.

Residential vs. Productive Lending:
A core aspect of the inquiry is understanding why banks favour residential mortgage lending over loans to businesses and agriculture. It will examine the return on capital for each sector and whether this shift is linked to regulatory influences.

Rural Banking Challenges:
The investigation will assess how RBNZ’s capital requirements and credit risk models impact lending rates for agriculture and horticulture businesses. Additionally, it will consider how environmental and sustainability policies could be driving up costs in these sectors.

Barriers to Competition:
The inquiry will look at potential barriers that limit growth for non-bank deposit takers (NBDTs) and fintechs. This includes restrictions on overseas investment, the role of Kiwibank as a competitor, and the effectiveness of open banking initiatives.

Māori Banking Access:
The committee will investigate whether banks are placing unreasonable restrictions on Māori land as collateral and whether existing processes contribute to low homeownership rates among Māori.

Implications for the RBNZ:

A significant part of the inquiry will focus on the RBNZ’s regulatory framework, particularly whether its capital requirements and emphasis on financial stability are stifling competition. The inquiry will also consider if these regulations are unduly influencing lending rates across different sectors, including rural and business lending.

Why Banks tend to favour lending for home loans over farming and small business loans?

Lower Risk and Predictable Returns:

Residential mortgages are considered safer investments for banks. Housing markets are generally more stable, and homes provide a tangible asset that can be easily repossessed and sold if the borrower defaults. In contrast, farming and small business loans carry higher risks due to unpredictable income streams, market volatility, and industry-specific challenges.

Regulatory and Capital Requirements:

Regulatory frameworks often make residential lending more attractive. For example, capital requirements imposed by regulators like the Reserve Bank typically require banks to hold more capital against higher-risk loans, such as those for agriculture or small businesses. This can make such lending more expensive and less profitable for banks compared to residential loans.

Higher Demand and Profitability:

The demand for home loans is generally higher, driven by strong property markets and a desire for homeownership. With consistent demand, banks can achieve stable returns and lower their overall risk exposure. Additionally, residential loans are often larger and have longer repayment periods, making them more profitable in the long run.

Simplicity and Standardization:

Residential mortgage lending is highly standardized, allowing banks to streamline their processes and reduce costs. In contrast, loans to farmers or small businesses require more customized assessments and involve complexities like evaluating business plans, cash flow projections, and market conditions, which require more resources and expertise.

Regulatory Incentives and Housing Focus:

Some regulations, especially those designed to ensure financial stability, indirectly favour home lending. Policies that prioritize financial stability often emphasize the need for banks to hold stable assets, like residential mortgages. This regulatory environment encourages banks to allocate more resources to home loans.

Looking at the Future

This inquiry is more than just an investigation—it’s a step towards leveling the playing field for all New Zealanders. By questioning the focus on housing over the productive sector, we have a real opportunity to reshape the banking system into one that supports innovation, growth, and fairness across every community. Together, we can push for a future where businesses, farmers, and everyday Kiwis are all empowered to thrive. This is a chance to build a financial landscape that drives progress and ensures everyone has a stake in New Zealand’s success.