The Australian government's response to the financial system inquiry could drive up interest rates at New Zealand's biggest lenders as their Australian parent banks seek higher returns because of the requirement that they hold more capital.
Australia's federal government has largely accepted the recommendations of the inquiry set up in late 2013 to conduct "a root and branch examination" of Australia's financial system.
As well as agreeing to improve the resilience of the financial system, the coalition will take up advice to make Australia's pension system more efficient, stimulate financial system innovation, ensure consumers of financial products such as credit and debit cards are treated fairly, and strengthen regulators.
While their New Zealand operations come under the jurisdiction of the Reserve Bank in Wellington, it is likely some of the impact of changes in Australia will be exported across the Tasman, says David Tripe, associate head of Massey University's School of Economics & Finance.
"It would be a reasonable assumption, if banks need to hold more capital they are likely to up their returns a bit too across the business as a whole," Tripe said. "That in general is likely to push up interest rates, although not by a huge amount."
The banks haven't waited for the government response to the inquiry to increase their capital.
In July, Westpac chief financial officer Peter King said the cost of holding more capital "will inevitably be borne by customers and shareholders".
New Zealand Bankers' Association chief executive Kirk Hope said the requirement for more capital does, in theory, imply higher interest rates but in reality, in the New Zealand market, competition in the lending market is weighing on interest rates.
Hope said that in some ways New Zealand is ahead of Australia in that it had already created a new financial adviser framework in the wake of the finance company collapses.
New Zealand also has its own review underway - the review of the Financial Advisers Act 2008 and the Financial Service Providers Act 2008.
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