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Kiwi banks’ low-risk nature avoids scandal

by Ali Cain | 01 Nov 2017
Government-owned KiwiBank’s influence on the market, and the banking system’s risk-averse nature, have been mooted as reasons why New Zealand banks have been devoid of scandal for many years. Kiwi banks’ low-risk nature avoids scandal - InFinance - FINSIA

While it’s been some time since evidence of a major systemic scandal has emerged in New Zealand’s financial system, it still has its challenges including loan sharks preying on vulnerable customers.

David Tripe is the associate professor, School of Economics and Finance, Massey University. He says in general New Zealand banks have been sensitive and respectful of the environment in which they operate.

“That means that when an issue comes up, the response isn’t solely based on how it will affect profits. The attitude is, ‘Let's work on this together’."

Tripe says there’s a social contract between banks and the community due to their role controlling the means of payments and providing a number of other basic services.

“It’s not written down, but if you acknowledge it's in place, you get mutual respect. If you don't acknowledge it, then banks just charge ahead and are surprised when people object.”

Tripe says trust in the financial system in New Zealand means consumers believe banks will do the right thing with their money. 

He says KiwiBank’s existence is also a check on the financial system. It was created in part in response to public dismay over bank branch closures in the 1990s.

Kiwibank is owned by New Zealand’s government, but competes against the other banks in the market. Tripe says there is some evidence banks' account keeping fees might have been higher but for the presence of KiwiBank.

The fact New Zealand is a relatively smaller country has also helped it escape scandals. But there are many other countries that also have good relationships between banks and customers. 

“If you look at Germany, there are lots of locally-owned, small savings banks. They often have municipal involvement in the governance structure, so that tends to limit the extent to which they can abuse the population.

“Banks’ relationship to society varies from country to country. It's more confrontational in the more ruthlessly capitalist environments,” says Tripe. 

Mitigating factors

Stuart Locke, professor of finance at the University of Waikato, does point out the banking system in New Zealand is predominantly Australian-owned. Which poses the question as to why the Australian banking system has experienced major scandals but the Kiwi system has not.

Locke notes the two countries’ regulatory systems are similar and the recruitment processes banks are alike. So these variables can’t account for differences in the financial sectors.

Locke points to New Zealand’s strong record on transparency and corruption as some factors that could account for the squeaky-clean nature of the Kiwi banking sector.

But he suggests looking under the bonnet at the non-bank part of the financial system that experiences difficulties from time to time.

“It’s a difficult area and the government has passed regulations trying to control loan sharks. But that’s unlikely to solve the problem,” he says.

The inherently conservative nature of the Kiwi banking system is another reason Locke gives for its scandal-free status. 

He says banks tend to be very conservative lenders to small business borrowers and small borrowers generally. They can do this because they have plenty of business from quality large borrowers.

As a country without a strong base of domestic savings, much of the money lent out by the banks on mortgages is borrowed offshore. The more they borrow, the higher the risk. One way of mitigating overall risk is not to move into risky areas, which appears to be the approach of Kiwi banks.

“But there's a bit of exclusion [of some customer groups]. My feeling is our banking system has left some holes in the more vulnerable areas in the community. If you transfer the risk by not engaging in certain sectors then you don't look as if you're a problem.”

Kiwibank is positioning to step into that area, to provide services to people other banks won't deal with, says Locke. 

Locke doesn’t see any real change in the status quo in the near term and expects banks to remain conservative lenders. 

“The big four banks have the lion's share of what is really quite a small market, that they're happy and comfortable with that and I think they'll continue to be relatively conservative.” 


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