MPs have lashed out at banks for failing to reduce mortgage rates, for protecting their profits, and in the case of Australian institutions, for treating New Zealand firms differently.
Labour Party finance spokesman David Cunliffe in a statement urged the banks to listen.
"Today's report is a strong bipartisan statement of concern that the banking sector would do well to heed," he said.
Parliament's finance and expenditure committee's report on the Reserve Bank of New Zealand's May financial stability report was released this afternoon.
The committee's report said MPs were concerned that some banks did not pass on the latest cut to the official cash rate and only Westpac and ANZ National significantly reduced floating rates.
However, it noted since the last peak of the OCR mid-last year a large proportion of cuts were passed onto floating rates.
The committee's report said mortgage rates did not appear to reflect the price the banks were paying to fund lending.
"We are surprised and concerned that longer-term mortgage rates have risen recently, even though conditions in bank funding markets have started to ease."
The report noted the Reserve Bank said in explanation that international swap rates increased at the same time that many banks and governments were seeking to raise funds.
"To maximise the positive effect of the OCR cuts on the economy we urge banks to pass on OCR cuts to their interest rates to the maximum extent possible," the report said.
The MPs wrote they were surprised at the minimal impact on banks' profits in the past year.
"We would expect that the banking sector would take on a greater role in sharing the burden of the current recession ... We consider that banks could further reduce interest-rate margins whilst maintaining an acceptable level of profitability."
The MPs said the banks were effectively getting a subsidy through the government's retail deposit subsidy scheme given their resilient profits.
The MPs also said they considered it vital that Australian and New Zealand firms were treated equally.
Some banks offered different lending terms to firms depending which side of the Tasman they were on. The Reserve Bank told the committee that New Zealand subsidiaries of Australian banks operated separately from their parents but firms in both countries were finding it hard to get credit.
"The Reserve Bank is investigating whether banks have unreasonably withheld credit supply," the report said.
