The government taking full ownership of Kiwibank is a bailout in all but name – what are the risks now?

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By Martien Lubberink* from

The conversation

With the transfer this week of Kiwibank’s assets to a state-owned company, the New Zealand krona has taken full control of the bank. At an estimated cost of $2.1 billion, the change of ownership has all the hallmarks of a government bailout.

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The government has promised to recapitalize Kiwibank to help it grow.
Photo: RNZ / Nate McKinnon

Former owners NZ Post, the Accident Compensation Corporation and the New Zealand Superannuation Fund can be seen as justified in wanting to get out. It was an ailing bank in the making.

The key capital ratio fell from a healthy 13 percent in 2018 to 10.5 percent in June – the minimum the Australian Prudential Regulation Authority must meet for banks to be considered undeniably strong.

Return on equity hovered around 6 percent per annum, while the bank’s larger competitors offered returns that are twice as high. Added to this were the high capital requirements announced by the Reserve Bank in 2019, which are now being phased in.

Too important to fail?

The government has promised to recapitalize the bank to help it grow. Whatever the official name of the rescue operation, it was the only realistic option. That said, the government cited several reasons for its decision to hand over control.

One was to keep the bank in New Zealand hands. The government has also pledged its full commitment to support Kiwibank to become a true competitor in the banking industry. And finally, the transfer ensures that “all future profits remain in the country – unlike the Australian banks”.

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But these justifications are not to be taken lightly, and it is worth looking at them one by one.

Keeping profit in the country

The idea that keeping profits in the country automatically creates value for New Zealanders is by no means a given.

Kiwibank’s last reported profit was $136 million, or $25 per New Zealander. This pales in comparison to the profits reported by the four major Australian banks: about $6 billion in total, or $1200 per capita.

Other banks either keep their profits or pay them out to their owners and shareholders. In practice, these are institutional investors such as pension funds and insurance companies, some of which are based in New Zealand.

In addition, New Zealanders holding shares in Australian banks will receive dividends. Unlike the owner of Kiwibank, these Kiwi investors will benefit directly from their investments.

Finally, it should be noted that banks have built up profits in New Zealand due to increasing capital requirements. As of 2018, the four Australian banks in New Zealand have withheld profits of $12 billion. These would otherwise be passed on to their parents across the Tasman.

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Again, these banks contribute to a stable financial system, keep the profits in the country and do not need any support.

Locally owned

In practice, all New Zealand banks are locally incorporated due to Reserve Bank requirements. Foreign-owned banks operate largely independently of their parents. This has caused inconvenience.

For example, ASB cannot freely use new technologies developed by its owner Commonwealth Bank, even though there would be economies of scale if it were allowed.

Also, creditors cannot hold a foreign parent bank liable if its New Zealand subsidiary goes bankrupt. It is therefore unlikely that foreign ownership would significantly alter Kiwibank’s operations.

But the prospect of foreign ownership could add value. It could encourage its management to put in more effort to grow and compete.

Viability and Competition

With a 5 percent market share, Kiwibank is small and lacks the critical mass needed to thrive and compete effectively. The small size is already problematic, as the bank cannot serve large customers. For example, the government is not dependent on Kiwibank for its banking.

The growth opportunities for Kiwibank are further limited because the New Zealand banking market is highly regulated and conservative. European banks, for example, are much further ahead when it comes to adopting new technologies. Transfers between European bank accounts are made in real time, while such transfers in New Zealand still take hours.

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The government states that the banking market has become more competitive since Kiwibank was founded. According to Treasury Secretary Grant Robertson, Kiwibank continues to put pressure on the big four.

It may be, but other small competitors would too. For example, Rabobank is competitive in farmers’ loans. Other small banks remain well capitalized and do not face the same challenges as Kiwibank.

The risks ahead

The most likely way for Kiwibank is to further expand lending to riskier customers. Robertson has already alluded to this, arguing that Kiwibank could be a disruptor in the industry by focusing on small and medium-sized enterprises.

The problem is that Kiwibank needs the expertise to do this. Adding capital is not enough. And the government will want to prevent Kiwibank from taking too much risk, because that would endanger the future of the bank itself.

Added to this is the risk that the owner of Kiwibank will want to interfere in his activities. While the current government promises to respect operational independence, who knows what a future government might do.

Finally, there is the question of moral hazard – setting a precedent for other banks. What if one of the other, smaller banks gets into trouble? Will the government intervene? Again, the decision to save Kiwibank suggests that the future may indeed be uncertain.

* Martien Lubberink is associate professor of economics at Te Herenga Waka – Victoria University of Wellington.