Banks should help support businesses and households through tough economic times, even if it affects profits, says Finance Minister Bill English.
Parliament's Finance and Expenditure Committee has issued a warning to the banking sector, saying it is unhappy about the failure to drop lending rates while banks continue to make healthy profits.
The committee says that despite several cuts to the Official Cash Rate, mortgage rates have not fallen, and in some cases have risen.
Mr English says the Government has no direct role in setting interest rates, or intervening in banks' operations, but he says banks should be listening to their customers.
But banks have rejected criticism of their profits by the select committee and business and consumer groups.
ANZ National Bank says its profits are down 30%, and that its interest rates are constantly under review.
Westpac says all banks have suffered a drop in profits, and while it expects that trend to continue, it is vital to the economy that banks are profitable. Westpac says customers have in fact benefitted from drops in lending rates.
Kiwibank says it should not be criticised because its floating mortgage rate is the lowest available.
The committee, in releasing its openly critical report in advance of Thursday's Official Cash Rate review, notes banks' argument that overseas lending rates have more effect than the Official Cash Rate.
However, it says the rate still has a significant impact on floating mortgage rates and cuts should be passed on to customers.
Committee chairman Craig Foss says the margin between the Official Cash Rate and floating rates seems to be very wide and is not therefore as tight as the rest of the economy.
MPs could go further
The Labour Party says failure to adequately heed the warning may provoke legislative intervention.
Labour MP David Cunliffe, who is a member of the committee, says banks need to be good corporate citizens and pass on rate cuts.
Mr Cunliffe says he is sure banks do not want to push Parliament or the Government to ask the Reserve Bank to be more intrusive.
Green Party co-leader Russel Norman says the committee is running out of patience with banks, which he says should be sharing the pain of businesses, homeowners and people who are losing their jobs during the recession.
Money experts disagree over whether banks are unfairly profiting.
Asset manager Brian Gaynor says banks are not charging excessive amounts for mortgages and they do respond to competitive pressure.
However, Gray Eatwell from the Bank Customers' Action Collective says banks are making profits unfairly.