Election Economic Misconceptions (7) Banking Competition Failure

Various examples show that competition does not lead to a significant reduction in prices. The best example is the banking sector.

New Zealand has four major banks competing with each other, and several smaller financial businesses also offering residential mortgages to households. The government established government-owned Kiwibank to bring more competition to the sector. The results have been disappointing. The banks tend to watch each other, and their mortgage interest rates tend to track each other. There is very little evidence that the additional competition pushed mortgage interest rates down.

The big Australian-owned banks continue to make big profits. This is not surprising, given the way that businesses behave. The banks compete on service, but they rarely compete seriously on price. That is rational behaviour in a free market.