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1. Background

The Official Cash Rate (OCR) promulgated by the Reserve Bank of New Zealand (RBNZ) has been cut by 575 basis points (5.75%) since its peak over the last year, in response to weaker domestic economic conditions and the global financial crisis (GFC). Over the same period short term variable interest rates on home loans have fallen by 430 basis points, and to small businesses and farm loans by as little as 250 basis points.

This has raised concerns from the Reserve Bank, Parliament’s Finance and Expenditure Committee and a wide range of business groups from Federated Farmers, the Employers and Manufacturers Association, and Manufacturers and Exporters Association and the Productive Economy Council. The Reserve Bank has stated publicly that interest margins on short term lending are at “historically high levels”.

For many households and small businesses struggling to make ends meet in the recession the prospect of paying significantly higher interest rates than potentially warranted by the OCR is causing serious and widespread concern. The Prime Minister has called on the RBNZ to take action in respect of the issue. However neither further RBNZ actions, not further pass through of OCR cuts appear to have occurred.

Against this background New Zealand’s major banks contend that their interest rates and margins are fully justified in current conditions, citing reduced margin spreads and banking profitability and rising provisions for bad debts in the face of the deepening recession. Banks note that the cost of wholesale funds sourced internationally and the cost of domestic deposits have both increased. In addition moves by the Reserve Bank to implement new reserve asset standards are said to be tightening monetary conditions.

The New Zealand public has to date not had sufficient opportunity to see these arguments played out in the public domain, nor had access to the data that would allow them to draw their own conclusions. There is a significant public interest in establishing whether or not OCR cuts have been unreasonably withheld by the banking sector or whether this reflects reasonable increases in the banks’ own costs.

Parliament’s Finance and Expenditure Committee considered whether to hold a Select Committee Enquiry into these matters. Government members initially proposed a narrow scope for consideration; Opposition members initially proposed a broader scope but were willing to accept the Government members’ proposal. At a subsequent meeting, for reasons still unclear, Government members voted against their own proposal.

2. The Parliamentary Banking Inquiry

Labour, the Greens and the Progressives believe these issues are too important, and the public interest too strong, for the public to be denied the transparency that a public inquiry would provide. Accordingly on 21 July the parties announced a multi-party Parliamentary Inquiry to which all other parties and Parliament have been invited, to be held at Parliament in early September.

The aim of the Inquiry is to provide a fair and balanced forum for all submitters – from banks to businesses to individuals – to have their say. The Inquiry will be supported by independent experts and its report will be internationally peer reviewed.

Despite earlier denying access to select committee facilities, the Speaker of Parliament has now made available proper meeting rooms in a neutral area of the Parliamentary complex. Public submissions were called for on 21 July and close on 31 August 2009. Public hearings are scheduled for the week of 1 – 4 September 2009.

3. Scope

The primary focus of the Banking Inquiry will be on the pass-through of recent cuts to the RBNZ Official Cash Rate (OCR) to short term variable interest rates. This is the most pressing issue identified by the Reserve Bank in its commentary to date.

Banks and other interested groups have also argued that the pass-through issue must be seen in context. Accordingly the following contextual issues have been deemed relevant and within the scope of the Inquiry:

  • lending margins, including the cost of wholesale funding from various sources
  • banking profitability and how that has changed over time
  • bad debt and risk provisioning by banks
  • lending terms and practices
  • other matters considered relevant by submitters

4. Submissions

  1. Public submissions were called for on 21 July and close on 31 August 2009. Submissions can be made easily online at www.bankinquiry.org.nz or by freepost to:
    The Parliamentary Banking Inquiry
    Room 3.046
    Parliament House
    WELLINGTON
  2. Because the Banking Inquiry is NOT a Select Committee inquiry submissions are not covered by Parliamentary privilege and therefore bear their own legal risk. The Inquiry reserves the right to withhold or return to submitters any material it considers may be inappropriate or pose legal risks.
  3. The Inquiry process will resemble that of a Select Committee, although it is unlikely that all political parties will be represented. General guidance on making a submission can be found on the Parliamentary website at http://www.parliament.nz/en-NZ/AboutParl/HowPWorks/Procedures/4/9/e/00CLOOCMakingSubmission1-Making-a-submission-to-a-Parliamentary-select.htm
  4. Members of the public and interested groups are welcome to appear present their submissions to the Inquiry, either in person at Parliament or via teleconference or videoconference. PLEASE MAKE CLEAR IN YOUR WRITTEN SUBMISSION IF YOU WISH TO BE HEARD IN PERSON. Further information on hearing times and schedules of submissions will, be available in due course at www.bankinquiry.org.nz
  5. Submissions will be made public and posted on the Inquiry website. In limited circumstances the Inquiry may be willing to hear evidence in confidence (until the Inquiry Report is issued) or in special circumstances in secret (not released). Should you wish to request this status you must clearly state this at the start of your submission. The Inquiry reserves the right to withhold or return to submitters any material it considers may be inappropriate or pose legal risks.
  6. The Inquiry will sit during the first week of September 2009. Hearing dates and schedules will be posted on the Inquiry website: www.bankinquiry.org.nz

5. Inquiry membership

To date, confirmed participating members are the New Zealand Labour Party, the Green Party and the Progressive Party. All other parties in Parliament have been invited and are welcome to attend.

By agreement between the participating parties the MPs sitting on the Inquiry will include:

  • Hon David Cunliffe MP (Chair), Labour Spokesperson on Finance
  • Dr Russel Norman MP, Co-Leader, Green Party
  • Hon Jim Anderton MP, Leader, Progressive Party
  • Hon David Parker MP, Associate Finance Spokesperson, Labour
  • Hon Clayton Cosgrove MP, Associate Finance Spokesperson, Labour
  • Hon Shane Jones MP, Economic Development Spokesperson, Labour

(Substitutions or additions may occur by arrangement)

6. Inquiry staffing and resources

  1. The Inquiry will be held in the Ministerial meeting rooms located at 2.04/2.05, Executive Wing (“The Beehive”), Parliament Buildings Public access is via the main Executive Wing entrance on the ground floor. The Speaker of Parliament has consented to the use of these facilities.
  2. The Inquiry will be staffed by dedicated staff and leading experts, funded from within the existing parliamentary resources of the participating parties. There will be no significant additional costs to the taxpayer from the Inquiry.
  3. Expert advisors and peer reviewers have been engaged to assist the Inquiry to work through the arguments and evidence presented in submissions, to undertake any related research and to prepare and review a high-quality draft report. These experts include:
    1. Mr David Preston (M Com. Hons (Econ), BA, A Prof) (Advisor).
      Mr Preston is an independent consultant with a background in finance and economics who has previously served in the New Zealand Treasury and at the International Monetary Fund. He has consulted widely in New Zealand and around the Pacific on economic and social policy issues.
    2. Professor John Quiggen (BA Math (Hons I), B Ec (Hons I), M Ec (ANU), PhD (UNE), FASSA, FAICD), (Peer Reviewer).
      Professor Quiggen is the Director of the Risk and Sustainable Management Group, University of Queensland; and a distinguished Fellow of the Australian Research Council. He is a widely published author and opinion columnist, including for the Australian Financial Review. He is one of several leading Australian economists who have recently written to Prime Minister Rudd urging reform of the Australian banking sector.
    3. Professor Tim Hazledine (BA Math/Econ, MA Econ, PhD Econ (Warwick) (Peer Reviewer).
      Professor Hazledine is Head of Department, Economics, at the University of Auckland. He has taught at Auckland, Warwick and Oxford, and at Queens and UBC in Canada. He is a widely published author and multiple award winner in economics. His fields of expertise include macro and micro economics, international trade and finance and completion economics. He has consulted widely internationally and brings a broad perspective to the work of the Banking Inquiry.

6. Contact us

Parliamentary Banking Inquiry Secretariat
Phone: 04 817 8208
Email: annie.williams@parliament.govt.nz