WEBVTT - Bonus: Is banking set for some big changes?

0:00:00.960 --> 0:00:03.640
<v Speaker 1>You're listening to a Sheerseise podcast.

0:00:04.200 --> 0:00:06.840
<v Speaker 2>Is it going to get harder to tell what a

0:00:06.920 --> 0:00:10.479
<v Speaker 2>bank is and whether if something is calling itself a bank,

0:00:10.560 --> 0:00:14.239
<v Speaker 2>that it's really as safe as any other kind of bank.

0:00:14.920 --> 0:00:19.160
<v Speaker 1>So I believe that the Reserve Bank will still maintain

0:00:19.239 --> 0:00:22.799
<v Speaker 1>its list of what constitutes a bank or not, and

0:00:22.880 --> 0:00:28.960
<v Speaker 1>there are certain requirements such as credit ratings, minimum capital

0:00:29.040 --> 0:00:33.320
<v Speaker 1>requirements that so called banks will still have to maintain,

0:00:33.400 --> 0:00:38.880
<v Speaker 1>So that provides some assurance and distinguishing factors. But it's

0:00:38.920 --> 0:00:42.880
<v Speaker 1>true that in terms of the services that are being offered,

0:00:43.240 --> 0:00:47.479
<v Speaker 1>the line between what we traditionally know as banks and

0:00:48.080 --> 0:00:52.640
<v Speaker 1>those institutions that are effectively offering banking services borrowing and

0:00:52.760 --> 0:00:54.520
<v Speaker 1>lending are being blurred.

0:00:55.600 --> 0:00:58.120
<v Speaker 2>Is that a good thing bad thing? Good? Good for

0:00:58.200 --> 0:00:59.360
<v Speaker 2>some people, bad for others.

0:00:59.520 --> 0:01:01.760
<v Speaker 1>Yeah, it's a great question, and that's why I find

0:01:01.800 --> 0:01:05.600
<v Speaker 1>this whole podcast episode so fascinating, because I think the

0:01:05.680 --> 0:01:08.320
<v Speaker 1>answer is not clear cut. I think it is nuanced

0:01:09.040 --> 0:01:14.840
<v Speaker 1>in some sense. Many people worry that New Zealand's banking

0:01:14.920 --> 0:01:18.480
<v Speaker 1>sector is highly concentrated. Some people argue that it is

0:01:18.520 --> 0:01:22.520
<v Speaker 1>not very competitive, and there have been calls to, for example,

0:01:23.520 --> 0:01:29.520
<v Speaker 1>revisit capital requirements of late to promote more competition and

0:01:29.640 --> 0:01:30.480
<v Speaker 1>unlock growth.

0:01:31.080 --> 0:01:33.880
<v Speaker 2>Essentially, because if you're a big bank, you might not

0:01:33.959 --> 0:01:37.080
<v Speaker 2>have to carry quite so much capital to offset your

0:01:37.160 --> 0:01:39.160
<v Speaker 2>lending is if you're a smaller bank, right.

0:01:39.080 --> 0:01:43.160
<v Speaker 1>Yeah, scale really matters. The effective cost to the entity

0:01:43.240 --> 0:01:46.240
<v Speaker 1>is much smaller when you're a very large bank. And

0:01:46.280 --> 0:01:50.560
<v Speaker 1>so these changes, I would argue, do serve to promote

0:01:50.640 --> 0:01:53.400
<v Speaker 1>competition in the sense that the larger banks have more

0:01:53.400 --> 0:01:57.400
<v Speaker 1>stringent requirements than the smaller players, and so in that sense,

0:01:57.440 --> 0:02:01.720
<v Speaker 1>I think even if the uptake of services among these

0:02:01.760 --> 0:02:05.480
<v Speaker 1>smaller players is low, a lot of these things are

0:02:05.600 --> 0:02:09.239
<v Speaker 1>very difficult to These regimes are very difficult to change

0:02:09.240 --> 0:02:11.519
<v Speaker 1>because once people as you and I know, once we're

0:02:11.520 --> 0:02:14.000
<v Speaker 1>with a bank, it's very costly to switch everything over.

0:02:14.880 --> 0:02:17.519
<v Speaker 1>But even the threat of that competition, I think is

0:02:17.680 --> 0:02:22.280
<v Speaker 1>enough to get these institutions to behave more competitively.

0:02:22.639 --> 0:02:25.040
<v Speaker 2>So that only works if you've got these smaller kind

0:02:25.040 --> 0:02:29.239
<v Speaker 2>of non bank deposit takers or bank like institutions getting

0:02:29.240 --> 0:02:33.400
<v Speaker 2>in there and competing. Are they pretty much offering the

0:02:33.400 --> 0:02:35.799
<v Speaker 2>same kinds of services or are they doing things differently?

0:02:36.120 --> 0:02:38.680
<v Speaker 1>Yeah, it depends on how you look at it. In

0:02:38.760 --> 0:02:43.600
<v Speaker 1>terms of taking deposits and lending and monitoring activities. These

0:02:43.639 --> 0:02:46.120
<v Speaker 1>are all equivalent to what the big banks are doing,

0:02:46.560 --> 0:02:50.120
<v Speaker 1>but I think the focus and the concentration is quite different.

0:02:50.200 --> 0:02:54.240
<v Speaker 1>So building societies, credit unions, these tend to be more

0:02:54.320 --> 0:02:59.880
<v Speaker 1>sectorially focused or geographically concentrated, and that has its pro

0:03:00.200 --> 0:03:04.120
<v Speaker 1>and cons. The pros are that arguably these institutions are

0:03:04.120 --> 0:03:08.440
<v Speaker 1>more specialized, have better information to monitor and select the

0:03:09.440 --> 0:03:12.200
<v Speaker 1>right kinds of debtors in such an environment. But the

0:03:12.280 --> 0:03:16.720
<v Speaker 1>downsides are that there are often concentrated risks in these

0:03:16.760 --> 0:03:20.520
<v Speaker 1>geographical or sectoral spaces, so when things go pair shaped,

0:03:21.040 --> 0:03:23.200
<v Speaker 1>it's more likely to go pair shaped for everyone.

0:03:23.800 --> 0:03:26.360
<v Speaker 2>Right, Right, so big bedstorm wipes out the whole rural

0:03:26.360 --> 0:03:28.280
<v Speaker 2>economy in that area. You're in trouble. But on the

0:03:28.320 --> 0:03:30.360
<v Speaker 2>other hand, you know what the neighbors are saying about

0:03:30.720 --> 0:03:32.799
<v Speaker 2>this guy, and so you're not going to necessarily advance

0:03:32.840 --> 0:03:35.160
<v Speaker 2>credit to him on the same basis that a big

0:03:35.200 --> 0:03:35.600
<v Speaker 2>bank might.

0:03:35.880 --> 0:03:39.040
<v Speaker 1>Yeah, that's that's exactly it. And I mean, over the

0:03:39.040 --> 0:03:42.560
<v Speaker 1>past decade we've seen about forty percent of bank branches close,

0:03:43.200 --> 0:03:46.560
<v Speaker 1>especially from the big branches, and so that loss of

0:03:46.600 --> 0:03:50.800
<v Speaker 1>soft information and that those kinds of relational banking services

0:03:50.800 --> 0:03:55.240
<v Speaker 1>that used to be very helpful in extending loans. I

0:03:55.240 --> 0:03:57.840
<v Speaker 1>would argue that we're losing yeah, okay.

0:03:58.800 --> 0:04:02.480
<v Speaker 2>To a non bank deposit tak What makes them different?

0:04:03.040 --> 0:04:05.560
<v Speaker 2>They're just doing what a bank does, but they're not

0:04:05.560 --> 0:04:07.400
<v Speaker 2>allowed to call themselves a bank or is there something

0:04:07.400 --> 0:04:08.320
<v Speaker 2>else in there as well?

0:04:08.480 --> 0:04:11.760
<v Speaker 1>Yeah, So previously non bank deposit teakers didn't have access

0:04:11.800 --> 0:04:16.520
<v Speaker 1>to reserve bank facilities as well to borrow and land

0:04:16.560 --> 0:04:20.200
<v Speaker 1>at the official cash rate. This is also changing and

0:04:20.320 --> 0:04:24.039
<v Speaker 1>a topic of undercurrent discussion is whether these non bank

0:04:24.080 --> 0:04:28.560
<v Speaker 1>deposit takers should also have access to lender of last

0:04:28.600 --> 0:04:33.840
<v Speaker 1>resort and public backstops, which would essentially fall on the treasury.

0:04:34.440 --> 0:04:35.840
<v Speaker 1>And so this is a big question that.

0:04:35.760 --> 0:04:37.800
<v Speaker 2>I a you and me basically yes.

0:04:37.520 --> 0:04:40.560
<v Speaker 1>The taxpayers. So I think this is something that will

0:04:40.600 --> 0:04:42.839
<v Speaker 1>be a big concern for regulators going forward.

0:04:43.040 --> 0:04:45.840
<v Speaker 2>Yeah, I suppose. I think about like the history and

0:04:45.880 --> 0:04:48.719
<v Speaker 2>the recent history here, we had the GFC in this country.

0:04:48.800 --> 0:04:53.520
<v Speaker 2>The way it turned up wasn't like big merchant banks

0:04:53.600 --> 0:04:56.240
<v Speaker 2>like Layman Brothers that were falling over. It was these

0:04:56.320 --> 0:04:58.800
<v Speaker 2>finance companies a lot of the time that were falling over.

0:04:58.960 --> 0:05:01.440
<v Speaker 2>So have we kind of gone through the cycle again

0:05:01.520 --> 0:05:03.000
<v Speaker 2>or have we learned from that?

0:05:03.720 --> 0:05:06.400
<v Speaker 1>Yeah, that's a very good question. I think the Frank

0:05:06.480 --> 0:05:09.760
<v Speaker 1>Act in the US spawned a lot of local legislation

0:05:09.960 --> 0:05:13.920
<v Speaker 1>to follow suit and regulation leading to higher prudential supervision.

0:05:14.440 --> 0:05:18.040
<v Speaker 1>New Zealand is an interesting case in some for some

0:05:18.440 --> 0:05:23.680
<v Speaker 1>non bank deposit takers, we have custodial supervision as opposed

0:05:23.720 --> 0:05:27.200
<v Speaker 1>to direct supervision from the reserve bank. I think that's

0:05:27.200 --> 0:05:32.720
<v Speaker 1>an interesting feature that I would argue we also need

0:05:32.760 --> 0:05:35.839
<v Speaker 1>to give thought to who guards the guards?

0:05:36.760 --> 0:05:39.680
<v Speaker 2>What does that mean? Explain that to make custarlia visus

0:05:39.680 --> 0:05:40.560
<v Speaker 2>direct supervision.

0:05:40.760 --> 0:05:44.520
<v Speaker 1>So custodial supervision means a third party, a third entity

0:05:44.600 --> 0:05:48.719
<v Speaker 1>is responsible for monitoring and making sure that the entity

0:05:48.880 --> 0:05:51.240
<v Speaker 1>is adhering to all the standards set out by the

0:05:51.240 --> 0:05:56.159
<v Speaker 1>Council of Financial Regulators, whereas direct supervision is where the

0:05:56.200 --> 0:06:00.280
<v Speaker 1>reserve Bank itself is going and monitoring and supervising these banks.

0:06:00.839 --> 0:06:02.600
<v Speaker 2>Yeah, and maybe you think there's a scope for a

0:06:02.600 --> 0:06:04.440
<v Speaker 2>little bit more of that or less of that.

0:06:04.920 --> 0:06:08.640
<v Speaker 1>I think ideally I would argue that directed provision is best.

0:06:08.720 --> 0:06:12.679
<v Speaker 1>It reduces these principal agent problems, where even while meaning

0:06:12.720 --> 0:06:17.080
<v Speaker 1>third parties might for various reasons and under various incentives

0:06:17.120 --> 0:06:21.720
<v Speaker 1>miss out on key risks, especially from a macro prudential lens,

0:06:21.960 --> 0:06:24.599
<v Speaker 1>in terms of across the whole system. You know, one

0:06:24.720 --> 0:06:27.880
<v Speaker 1>entity might look very good in its books in isolation,

0:06:28.320 --> 0:06:31.080
<v Speaker 1>but the benefit of having a single entity monitoring everyone

0:06:31.320 --> 0:06:33.800
<v Speaker 1>so that you can look at the system as a whole.

0:06:33.640 --> 0:06:35.640
<v Speaker 2>You're starting to see the same problems turning up and

0:06:35.680 --> 0:06:37.560
<v Speaker 2>you're may be a little bit ahead of it, right, Yeah,

0:06:37.680 --> 0:06:39.200
<v Speaker 2>A lot of this is probably not going to be

0:06:39.440 --> 0:06:43.520
<v Speaker 2>on people's mind if they're looking about a particular financial

0:06:43.880 --> 0:06:47.120
<v Speaker 2>entity as a place to lend to, to give their

0:06:47.120 --> 0:06:49.480
<v Speaker 2>capital to an invest or, to borrow from, and so on.

0:06:49.680 --> 0:06:51.400
<v Speaker 2>Are these things people should be thinking about?

0:06:52.240 --> 0:06:54.480
<v Speaker 1>Well, As a first step, I would make sure that

0:06:54.640 --> 0:06:58.200
<v Speaker 1>the entity that you're banking with is registered, so the

0:06:59.400 --> 0:07:03.279
<v Speaker 1>register is publicly available, so it's always important to look

0:07:03.400 --> 0:07:07.080
<v Speaker 1>up if you're going with a lesser known, smaller bank,

0:07:07.200 --> 0:07:11.240
<v Speaker 1>to make sure that it's subject to the same supervisory standards.

0:07:12.520 --> 0:07:18.120
<v Speaker 1>And yeah, I think I think that the changing legislation

0:07:18.240 --> 0:07:22.160
<v Speaker 1>bringing all of these entities under the same overarching framework

0:07:22.360 --> 0:07:29.360
<v Speaker 1>is actually going to help the end consumer by concentrating

0:07:29.400 --> 0:07:30.800
<v Speaker 1>supervision so.

0:07:30.840 --> 0:07:32.600
<v Speaker 2>That at least there's one set of eyes looking on

0:07:32.640 --> 0:07:34.880
<v Speaker 2>it rather than us having to worry too much about exactly.

0:07:34.920 --> 0:07:36.640
<v Speaker 1>So that uses us up a little bit.

0:07:37.120 --> 0:07:38.880
<v Speaker 2>I suppose if you try and look ahead a little bit,

0:07:40.080 --> 0:07:43.360
<v Speaker 2>how would you sort of see the banking landscape changing

0:07:43.360 --> 0:07:45.440
<v Speaker 2>in the next five or ten years. We've got a

0:07:45.440 --> 0:07:48.200
<v Speaker 2>lot of disruption that feels like coming in. A lot

0:07:48.200 --> 0:07:51.000
<v Speaker 2>of people were banking license given to sort of one

0:07:51.160 --> 0:07:55.080
<v Speaker 2>very disruptive fintech in Australia just this week. Is that

0:07:55.120 --> 0:07:57.320
<v Speaker 2>what we're going to see a lot of international players

0:07:57.320 --> 0:08:01.000
<v Speaker 2>coming in with very very novel technology, quite a light

0:08:01.040 --> 0:08:04.040
<v Speaker 2>footfront and saying, you know, give us your money, will

0:08:04.080 --> 0:08:06.600
<v Speaker 2>lend you money, will help you, will bank you.

0:08:06.720 --> 0:08:10.640
<v Speaker 1>I saw the news of our Revolute applying for a

0:08:10.720 --> 0:08:13.200
<v Speaker 1>license in Australia, and I believe they're looking to do

0:08:13.280 --> 0:08:16.680
<v Speaker 1>so in New Zealand too. I do think that these

0:08:16.800 --> 0:08:21.440
<v Speaker 1>kinds of new banks have the potential to be quite

0:08:21.440 --> 0:08:25.840
<v Speaker 1>disruptive and to reshape the environment, not only because they

0:08:25.880 --> 0:08:30.440
<v Speaker 1>offer competitive rates and they offer the ease with which

0:08:30.520 --> 0:08:35.120
<v Speaker 1>someone can send money abroad, but also because they're promoting

0:08:35.120 --> 0:08:38.480
<v Speaker 1>a platform that's a bit like a world Guard and

0:08:38.520 --> 0:08:40.960
<v Speaker 1>it's kind of a one stop shop where you can

0:08:41.160 --> 0:08:45.760
<v Speaker 1>do everything from pay your friends, to receive your salary,

0:08:46.400 --> 0:08:49.240
<v Speaker 1>to invest in crypto, all of these different services that

0:08:49.280 --> 0:08:52.600
<v Speaker 1>I think traditional brick and mortar banks didn't double in,

0:08:53.000 --> 0:08:55.360
<v Speaker 1>and so I think it's going to cause the existing

0:08:55.400 --> 0:08:58.800
<v Speaker 1>players to think very carefully about their service offering and

0:08:59.080 --> 0:09:01.520
<v Speaker 1>whether they're into what extent they want to change to

0:09:01.640 --> 0:09:04.840
<v Speaker 1>compete with some of those services, or whether they're comfortable

0:09:04.880 --> 0:09:08.040
<v Speaker 1>in their market share. But they might want to think

0:09:08.040 --> 0:09:10.679
<v Speaker 1>about their rates and how to stay competitive there.

0:09:10.960 --> 0:09:13.800
<v Speaker 2>Because big banks, I mean the impression I get they

0:09:13.840 --> 0:09:17.480
<v Speaker 2>move pretty slow, right, they invest in technology, and then

0:09:17.520 --> 0:09:20.000
<v Speaker 2>it sort of stands still for quite a long time.

0:09:21.360 --> 0:09:24.000
<v Speaker 2>They're conservative, they don't want to make big changes. Does

0:09:24.040 --> 0:09:25.440
<v Speaker 2>that hamper them in some way?

0:09:26.120 --> 0:09:28.800
<v Speaker 1>I think in some way it does hamper them, and

0:09:28.880 --> 0:09:32.440
<v Speaker 1>it is I am sympathetic to just how costly it

0:09:32.480 --> 0:09:35.840
<v Speaker 1>is to change services. My mother works for a very

0:09:35.920 --> 0:09:38.480
<v Speaker 1>large South African bank and had to do a very

0:09:38.559 --> 0:09:42.079
<v Speaker 1>large scale system change, and so I rarely got to

0:09:42.120 --> 0:09:46.040
<v Speaker 1>see firsthand just what's involved, the costs involved. So the

0:09:46.080 --> 0:09:49.520
<v Speaker 1>benefit of the scale that these banks have has been

0:09:49.520 --> 0:09:55.040
<v Speaker 1>traditionally to offer competitive rates and more services like access

0:09:55.040 --> 0:09:59.400
<v Speaker 1>to qisaver and other financial products. But I do think

0:09:59.440 --> 0:10:03.920
<v Speaker 1>that use banks will need to revise some of their systems,

0:10:04.080 --> 0:10:07.760
<v Speaker 1>firstly in terms in the interest of competition, but also

0:10:08.000 --> 0:10:11.839
<v Speaker 1>in the interest of cybersecurity. So we've also seen a

0:10:11.960 --> 0:10:17.880
<v Speaker 1>very significant cyber incident this week from open ai and

0:10:17.960 --> 0:10:20.800
<v Speaker 1>hugging Face, and so I think that this will also

0:10:20.840 --> 0:10:25.560
<v Speaker 1>trigger banks to revisit some of their systems.

0:10:25.920 --> 0:10:28.520
<v Speaker 2>Almost wonder if it makes it so it was so

0:10:28.640 --> 0:10:32.560
<v Speaker 2>dramatic that it's almost impossible to defend against. I don't know,

0:10:32.559 --> 0:10:34.880
<v Speaker 2>maybe I'm being a bit nihilistic, but it feels almost

0:10:34.920 --> 0:10:37.120
<v Speaker 2>like any amount of money you're throwing at a problem,

0:10:37.200 --> 0:10:38.640
<v Speaker 2>it's still going to be a problem.

0:10:39.480 --> 0:10:41.000
<v Speaker 1>I think there is some degree of that.

0:10:41.120 --> 0:10:43.640
<v Speaker 2>So some of the I'm sure the regulators wouldn't see

0:10:43.640 --> 0:10:44.880
<v Speaker 2>it that way if you said it went hey, look

0:10:44.880 --> 0:10:49.440
<v Speaker 2>it's so bad, we're not going to try. But there

0:10:49.440 --> 0:10:52.520
<v Speaker 2>were a CBA call of thank of Australia were spinning

0:10:52.840 --> 0:10:54.720
<v Speaker 2>and I can't remember the figure actually, but it was

0:10:54.920 --> 0:10:57.120
<v Speaker 2>an astronomical might have been a billion dollars or something

0:10:57.720 --> 0:11:01.480
<v Speaker 2>trying to look at investing in cybersecurity. So these big

0:11:01.520 --> 0:11:06.559
<v Speaker 2>banks are spending vast sums trying to defend against cyber

0:11:06.600 --> 0:11:09.880
<v Speaker 2>attexts does that mean that a smaller bank is a

0:11:09.880 --> 0:11:10.600
<v Speaker 2>lot riskier.

0:11:11.559 --> 0:11:14.960
<v Speaker 1>I wouldn't say necessarily. The advantage that smaller banks have

0:11:15.080 --> 0:11:18.280
<v Speaker 1>is that they tend to be more flexible and they

0:11:18.280 --> 0:11:22.760
<v Speaker 1>can adapt more quickly to changing environments, and cybersecurity is

0:11:22.760 --> 0:11:25.760
<v Speaker 1>a very dynamic, fast paced environment, so I think that

0:11:25.800 --> 0:11:29.480
<v Speaker 1>actually gives them an edge. Bigger banks also tend to

0:11:29.480 --> 0:11:33.760
<v Speaker 1>have legacy systems that are working on top of one another.

0:11:33.760 --> 0:11:37.000
<v Speaker 1>They're layered, and they have all of these back doors

0:11:37.040 --> 0:11:40.600
<v Speaker 1>and these vulnerabilities that constantly need to be patched. But

0:11:40.720 --> 0:11:43.480
<v Speaker 1>for sure, I think it's a first order consideration for

0:11:43.640 --> 0:11:47.040
<v Speaker 1>big and small banks. Investing involves the risk you might

0:11:47.080 --> 0:11:49.520
<v Speaker 1>lose the money you start with. We recommend talking to

0:11:49.520 --> 0:11:51.040
<v Speaker 1>a licensed financial advisor.

0:11:51.760 --> 0:11:55.600
<v Speaker 2>We also recommend reading product disclosure documents before deciding to invest.