The Commerce Commission should be looking closely at banks' overall interest margins in its market study into personal banking services, says David Cunningham.

Cunningham is CEO of Squirrel Group, a mortgage broker that also offers lending and investing products and services, and a former CEO of The Co-operative Bank and manager at Westpac New Zealand.

In the latest episode of interest.co.nz's Of Interest podcast, Cunningham talks in detail about how interest rates are set for borrowers and savers, and the key area the Commerce Commission should look as it assesses competition for deposits and home loans.

Banks ultimately manage to the overall interest margin across both sides of their balance sheet covering their lending via the likes of home loans, and borrowing via the likes of deposits, Cunningham notes.

"Banks use something called transfer pricing, where they use the wholesale [interest] rate as a benchmark and then they assess the margin above that for loans and below that for deposits. But of course those margins on loans and deposits move in and out through the interest rate cycle. They're wider on lending at the lows, narrower in lending at the highs," says Cunningham.

"I think what the Commerce Commission should be looking at is that overall margin."

He says it's "disingenuous" for a banker to say margins are low on home loans at the moment without looking at the other side of the balance sheet because margins could be high on deposits.

"Unfortunately right now we're actually having that behaviour where we've got some banks setting rates with only reference, it would seem to me, to the wholesale [interest] rates."

"The key point is margins move in and out but you've got to look at the total. And that's what I think the Commerce Commission will be looking at, that quantum of the whole pricing decision. Not just a pricing decision on an individual product in isolation," says Cunningham.

The record low 0.25% Official Cash Rate (OCR) through most of 2020-2021 followed by a rapid increase to 5.50%, has allowed banks to expand interest margins by about 20%, Cunningham says.

"It's a lift in the price of the net margin you're charging on your product of 20%, which actually most New Zealand businesses would love if they could do that as an industry. And that's an oligopoly in action, and that's what the Commerce Commission will be exploring."

In the podcast Cunningham also talks about why he doesn't believe banks' net interest margins are justifiable at the moment, what to be wary of in a high interest rate environment including break fees, the role of bank capital in driving decisions on sectors banks like lending to, secured and unsecured lending, and how interest rates are set on everything from the OCR, to the bank bill benchmark rate, swap rates, home loans, term deposits, personal loans, car loans, credit cards, business lending, rural lending and bonds, and his own role in making fixed-term mortgages more popular than floating rates.