Big bank profits the price for stability, Bollard says

"Banks are learning to live with lower returns, although they are still higher than in most other banking systems."

BUSINESSDESK: New Zealand's big four Australian-owned banks earn more out of the nation than those in most other countries, but that is the price that must be paid for a sound financial system, former Reserve Bank governor Alan Bollard says.

Regulation of the big four banks – ANZ National Bank, Bank of New Zealand, Westpac Banking and ASB Bank – has improved during Dr Bollard's decade-long tenure and lenders have been efficient and dynamic, he says in an interview for the Reserve Bank Bulletin.

Still, he questioned why the banks continued to post earnings that are "large by most standards".

"Banks are learning to live with lower returns, although they are still higher than in most other banking systems," Dr Bollard says.

"Banking is an industry you want to be sound so you might be well prepared to live with a degree of allocative inefficiency – part of which may arise from an implicit subsidy of the system by the government – provided what you are getting in return is soundness and guarantees of soundness, which I think we are getting." 

According to Reserve Bank data, the big four locally incorporated banks' aggregate net profit was $2.78 billion in the 2011 financial year, the most since they collectively made $3.02 billion in 2008, before the global financial crisis.

Dr Bollard says the dominance of the big four created some barriers to entry to New Zealand's banking industry as a new player needed to have an economy of scale to access foreign funding.

"It will be interesting to see how institutions like Kiwibank attempt to overcome these barriers, but I'm not sure there is a strong case for regulatory intervention," he says.

Earlier this year, KPMG's annual Financial Institutions Performance Survey found lenders' interest margins improved slightly over 2011 to an average 2.2%, compared with 2.09% in 2010, while the ratio of after-tax profit to total average tangible assets rose to 0.86% from 0.74%.

Dr Bollard officially finished his term earlier this week, replaced by former World Bank executive Graeme Wheeler.

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