Speaker 1: You're listening to a Sheerseise podcast.
Speaker 2: Is it going to get harder to tell what a
Speaker 2: bank is and whether if something is calling itself a bank,
Speaker 2: that it's really as safe as any other kind of bank.
Speaker 1: So I believe that the Reserve Bank will still maintain
Speaker 1: its list of what constitutes a bank or not, and
Speaker 1: there are certain requirements such as credit ratings, minimum capital
Speaker 1: requirements that so called banks will still have to maintain,
Speaker 1: So that provides some assurance and distinguishing factors. But it's
Speaker 1: true that in terms of the services that are being offered,
Speaker 1: the line between what we traditionally know as banks and
Speaker 1: those institutions that are effectively offering banking services borrowing and
Speaker 1: lending are being blurred.
Speaker 2: Is that a good thing bad thing? Good? Good for
Speaker 2: some people, bad for others.
Speaker 1: Yeah, it's a great question, and that's why I find
Speaker 1: this whole podcast episode so fascinating, because I think the
Speaker 1: answer is not clear cut. I think it is nuanced
Speaker 1: in some sense. Many people worry that New Zealand's banking
Speaker 1: sector is highly concentrated. Some people argue that it is
Speaker 1: not very competitive, and there have been calls to, for example,
Speaker 1: revisit capital requirements of late to promote more competition and
Speaker 1: unlock growth.
Speaker 2: Essentially, because if you're a big bank, you might not
Speaker 2: have to carry quite so much capital to offset your
Speaker 2: lending is if you're a smaller bank, right.
Speaker 1: Yeah, scale really matters. The effective cost to the entity
Speaker 1: is much smaller when you're a very large bank. And
Speaker 1: so these changes, I would argue, do serve to promote
Speaker 1: competition in the sense that the larger banks have more
Speaker 1: stringent requirements than the smaller players, and so in that sense,
Speaker 1: I think even if the uptake of services among these
Speaker 1: smaller players is low, a lot of these things are
Speaker 1: very difficult to These regimes are very difficult to change
Speaker 1: because once people as you and I know, once we're
Speaker 1: with a bank, it's very costly to switch everything over.
Speaker 1: But even the threat of that competition, I think is
Speaker 1: enough to get these institutions to behave more competitively.
Speaker 2: So that only works if you've got these smaller kind
Speaker 2: of non bank deposit takers or bank like institutions getting
Speaker 2: in there and competing. Are they pretty much offering the
Speaker 2: same kinds of services or are they doing things differently?
Speaker 1: Yeah, it depends on how you look at it. In
Speaker 1: terms of taking deposits and lending and monitoring activities. These
Speaker 1: are all equivalent to what the big banks are doing,
Speaker 1: but I think the focus and the concentration is quite different.
Speaker 1: So building societies, credit unions, these tend to be more
Speaker 1: sectorially focused or geographically concentrated, and that has its pro
Speaker 1: and cons. The pros are that arguably these institutions are
Speaker 1: more specialized, have better information to monitor and select the
Speaker 1: right kinds of debtors in such an environment. But the
Speaker 1: downsides are that there are often concentrated risks in these
Speaker 1: geographical or sectoral spaces, so when things go pair shaped,
Speaker 1: it's more likely to go pair shaped for everyone.
Speaker 2: Right, Right, so big bedstorm wipes out the whole rural
Speaker 2: economy in that area. You're in trouble. But on the
Speaker 2: other hand, you know what the neighbors are saying about
Speaker 2: this guy, and so you're not going to necessarily advance
Speaker 2: credit to him on the same basis that a big
Speaker 2: bank might.
Speaker 1: Yeah, that's that's exactly it. And I mean, over the
Speaker 1: past decade we've seen about forty percent of bank branches close,
Speaker 1: especially from the big branches, and so that loss of
Speaker 1: soft information and that those kinds of relational banking services
Speaker 1: that used to be very helpful in extending loans. I
Speaker 1: would argue that we're losing yeah, okay.
Speaker 2: To a non bank deposit tak What makes them different?
Speaker 2: They're just doing what a bank does, but they're not
Speaker 2: allowed to call themselves a bank or is there something
Speaker 2: else in there as well?
Speaker 1: Yeah, So previously non bank deposit teakers didn't have access
Speaker 1: to reserve bank facilities as well to borrow and land
Speaker 1: at the official cash rate. This is also changing and
Speaker 1: a topic of undercurrent discussion is whether these non bank
Speaker 1: deposit takers should also have access to lender of last
Speaker 1: resort and public backstops, which would essentially fall on the treasury.
Speaker 1: And so this is a big question that.
Speaker 2: I a you and me basically yes.
Speaker 1: The taxpayers. So I think this is something that will
Speaker 1: be a big concern for regulators going forward.
Speaker 2: Yeah, I suppose. I think about like the history and
Speaker 2: the recent history here, we had the GFC in this country.
Speaker 2: The way it turned up wasn't like big merchant banks
Speaker 2: like Layman Brothers that were falling over. It was these
Speaker 2: finance companies a lot of the time that were falling over.
Speaker 2: So have we kind of gone through the cycle again
Speaker 2: or have we learned from that?
Speaker 1: Yeah, that's a very good question. I think the Frank
Speaker 1: Act in the US spawned a lot of local legislation
Speaker 1: to follow suit and regulation leading to higher prudential supervision.
Speaker 1: New Zealand is an interesting case in some for some
Speaker 1: non bank deposit takers, we have custodial supervision as opposed
Speaker 1: to direct supervision from the reserve bank. I think that's
Speaker 1: an interesting feature that I would argue we also need
Speaker 1: to give thought to who guards the guards?
Speaker 2: What does that mean? Explain that to make custarlia visus
Speaker 2: direct supervision.
Speaker 1: So custodial supervision means a third party, a third entity
Speaker 1: is responsible for monitoring and making sure that the entity
Speaker 1: is adhering to all the standards set out by the
Speaker 1: Council of Financial Regulators, whereas direct supervision is where the
Speaker 1: reserve Bank itself is going and monitoring and supervising these banks.
Speaker 2: Yeah, and maybe you think there's a scope for a
Speaker 2: little bit more of that or less of that.
Speaker 1: I think ideally I would argue that directed provision is best.
Speaker 1: It reduces these principal agent problems, where even while meaning
Speaker 1: third parties might for various reasons and under various incentives
Speaker 1: miss out on key risks, especially from a macro prudential lens,
Speaker 1: in terms of across the whole system. You know, one
Speaker 1: entity might look very good in its books in isolation,
Speaker 1: but the benefit of having a single entity monitoring everyone
Speaker 1: so that you can look at the system as a whole.
Speaker 2: You're starting to see the same problems turning up and
Speaker 2: you're may be a little bit ahead of it, right, Yeah,
Speaker 2: A lot of this is probably not going to be
Speaker 2: on people's mind if they're looking about a particular financial
Speaker 2: entity as a place to lend to, to give their
Speaker 2: capital to an invest or, to borrow from, and so on.
Speaker 2: Are these things people should be thinking about?
Speaker 1: Well, As a first step, I would make sure that
Speaker 1: the entity that you're banking with is registered, so the
Speaker 1: register is publicly available, so it's always important to look
Speaker 1: up if you're going with a lesser known, smaller bank,
Speaker 1: to make sure that it's subject to the same supervisory standards.
Speaker 1: And yeah, I think I think that the changing legislation
Speaker 1: bringing all of these entities under the same overarching framework
Speaker 1: is actually going to help the end consumer by concentrating
Speaker 1: supervision so.
Speaker 2: That at least there's one set of eyes looking on
Speaker 2: it rather than us having to worry too much about exactly.
Speaker 1: So that uses us up a little bit.
Speaker 2: I suppose if you try and look ahead a little bit,
Speaker 2: how would you sort of see the banking landscape changing
Speaker 2: in the next five or ten years. We've got a
Speaker 2: lot of disruption that feels like coming in. A lot
Speaker 2: of people were banking license given to sort of one
Speaker 2: very disruptive fintech in Australia just this week. Is that
Speaker 2: what we're going to see a lot of international players
Speaker 2: coming in with very very novel technology, quite a light
Speaker 2: footfront and saying, you know, give us your money, will
Speaker 2: lend you money, will help you, will bank you.
Speaker 1: I saw the news of our Revolute applying for a
Speaker 1: license in Australia, and I believe they're looking to do
Speaker 1: so in New Zealand too. I do think that these
Speaker 1: kinds of new banks have the potential to be quite
Speaker 1: disruptive and to reshape the environment, not only because they
Speaker 1: offer competitive rates and they offer the ease with which
Speaker 1: someone can send money abroad, but also because they're promoting
Speaker 1: a platform that's a bit like a world Guard and
Speaker 1: it's kind of a one stop shop where you can
Speaker 1: do everything from pay your friends, to receive your salary,
Speaker 1: to invest in crypto, all of these different services that
Speaker 1: I think traditional brick and mortar banks didn't double in,
Speaker 1: and so I think it's going to cause the existing
Speaker 1: players to think very carefully about their service offering and
Speaker 1: whether they're into what extent they want to change to
Speaker 1: compete with some of those services, or whether they're comfortable
Speaker 1: in their market share. But they might want to think
Speaker 1: about their rates and how to stay competitive there.
Speaker 2: Because big banks, I mean the impression I get they
Speaker 2: move pretty slow, right, they invest in technology, and then
Speaker 2: it sort of stands still for quite a long time.
Speaker 2: They're conservative, they don't want to make big changes. Does
Speaker 2: that hamper them in some way?
Speaker 1: I think in some way it does hamper them, and
Speaker 1: it is I am sympathetic to just how costly it
Speaker 1: is to change services. My mother works for a very
Speaker 1: large South African bank and had to do a very
Speaker 1: large scale system change, and so I rarely got to
Speaker 1: see firsthand just what's involved, the costs involved. So the
Speaker 1: benefit of the scale that these banks have has been
Speaker 1: traditionally to offer competitive rates and more services like access
Speaker 1: to qisaver and other financial products. But I do think
Speaker 1: that use banks will need to revise some of their systems,
Speaker 1: firstly in terms in the interest of competition, but also
Speaker 1: in the interest of cybersecurity. So we've also seen a
Speaker 1: very significant cyber incident this week from open ai and
Speaker 1: hugging Face, and so I think that this will also
Speaker 1: trigger banks to revisit some of their systems.
Speaker 2: Almost wonder if it makes it so it was so
Speaker 2: dramatic that it's almost impossible to defend against. I don't know,
Speaker 2: maybe I'm being a bit nihilistic, but it feels almost
Speaker 2: like any amount of money you're throwing at a problem,
Speaker 2: it's still going to be a problem.
Speaker 1: I think there is some degree of that.
Speaker 2: So some of the I'm sure the regulators wouldn't see
Speaker 2: it that way if you said it went hey, look
Speaker 2: it's so bad, we're not going to try. But there
Speaker 2: were a CBA call of thank of Australia were spinning
Speaker 2: and I can't remember the figure actually, but it was
Speaker 2: an astronomical might have been a billion dollars or something
Speaker 2: trying to look at investing in cybersecurity. So these big
Speaker 2: banks are spending vast sums trying to defend against cyber
Speaker 2: attexts does that mean that a smaller bank is a
Speaker 2: lot riskier.
Speaker 1: I wouldn't say necessarily. The advantage that smaller banks have
Speaker 1: is that they tend to be more flexible and they
Speaker 1: can adapt more quickly to changing environments, and cybersecurity is
Speaker 1: a very dynamic, fast paced environment, so I think that
Speaker 1: actually gives them an edge. Bigger banks also tend to
Speaker 1: have legacy systems that are working on top of one another.
Speaker 1: They're layered, and they have all of these back doors
Speaker 1: and these vulnerabilities that constantly need to be patched. But
Speaker 1: for sure, I think it's a first order consideration for
Speaker 1: big and small banks. Investing involves the risk you might
Speaker 1: lose the money you start with. We recommend talking to
Speaker 1: a licensed financial advisor.
Speaker 2: We also recommend reading product disclosure documents before deciding to invest.