The main effect of deregulation from 1984 was to remove the rules that restricted competition within the finance sector, particularly those that split the financial services market into different segments and set who could operate in each market segment. After 1987 there were only two categories of financial institution: registered banks and non-bank financial institutions. The main distinction between the two is that banks have to be registered with the Reserve Bank and are the only institutions which can use the word ‘bank’ in their name.
The fact that banks were no longer disadvantaged in competing against other classes of financial institution led to major changes. When the new law came into effect on 1 April 1987, the four existing trading banks – the Australia and New Zealand Banking Group (ANZ), the Bank of New Zealand (BNZ), the National Bank of New Zealand and Westpac – were the first four to register.
This number expanded rapidly. Another seven banks were registered in July 1987 – all were pre-existing businesses, generally in merchant banking, and most of them were branches or subsidiaries of international banks. These were followed by a further stream of new entrants, many of them existing non-bank financial institutions. Converting to bank status gave them greater freedom.
Banking status was granted to the Countrywide Banking Corporation (a former building society, which was a financial institution owned by its members), Postbank (the old Post Office Savings Bank), Auckland Savings Bank (later ASB Bank), Westland Bank, Taranaki Savings Bank (later TSB Bank) and Trust Bank New Zealand (all successors of trustee savings banks), the Rural Bank, and United Bank (another former building society).
Because of the law changes, savings banks disappeared as a separate class of financial institution, and most merchant banks also disappeared. The building-society sector shrank significantly – the major survivor, the Southland Building Society, obtained registration as a bank in 2008. The finance-company sector also shrank, with many of the former finance companies being absorbed into banks. In 2005 banks accounted for around 74% of the assets of banks and other financial institutions taken together.
Boom and bust
Deregulation both fostered and coincided with a financial boom and subsequent bust. The most public episodes, both triggered by the stock market crash of October 1987, involved the Development Finance Corporation and the Bank of New Zealand. The former collapsed after being sold by the government; the latter got into financial difficulties while the government was still a majority shareholder. It raised additional capital in mid-1989 but remained vulnerable; the government had to put $420 million into it before selling it to the National Australia Bank in November 1992.
In the early 1990s New Zealand had a large number of banks. It was difficult for some of them to maintain profitable businesses, particularly in the aftermath of the 1987 stock market crash and the property crash that followed on from that.
A process of consolidation followed. Postbank was acquired by ANZ, ASB absorbed Westland Bank, the Rural Bank was acquired by the National Bank and Countrywide acquired United Bank. In 1996 Westpac acquired Trust Bank New Zealand, and in 1998 the National Bank acquired Countrywide. ANZ bought the National Bank in 2003, to become ANZ National Bank. Partly in response to those mergers, but also in response to complaints about the service provided by foreign-owned banks, the government established Kiwibank in 2001 as a subsidiary of New Zealand Post.
A consequence of deregulation and the free entry of overseas banks into New Zealand was that by June 2009 less than 4.5% of the assets of the banking sector were held by New Zealand-owned registered banks. At that time seven of the 18 registered banks were Australian owned – including the four largest – accounting for 90% of the New Zealand banking sector by total assets.
Overseas banks were able to operate in New Zealand either as locally incorporated subsidiaries – which was generally preferred if they were accepting retail deposits from the general public – or as branches of their parent bank. In 2009 there were four banks that operated both a branch and a subsidiary in New Zealand.
To deal with complaints about their conduct, and to ensure reasonable standards of fairness in their relationships with customers, banks established a Code of Banking Practice. This came into force in March 1992, and from July 1992 was supported by the banking ombudsman, who considers customer complaints. Complaints can only be considered by the banking ombudsman if they have first been though the bank’s own internal complaints process.