Federated Farmers has issued a plea for banks to themselves absorb as much as possible of the additional costs of the new bank capital requirements and not "dump it all" on customers, and especially on under-pressure farmers.
The Reserve Bank has estimated the impact of the required lift in total capital to 18% for the four large banks and 16% for remaining smaller banks (from a current average of 14.1%) will be a 0.2% increase in average bank lending rates.
"But the impact on farming is likely to be much higher," Federated Farmers commerce spokesperson Andrew Hoggard says.
"This is because there is less lending competition in the agricultural sector and we know banks are already looking to reduce their exposure to farm debt. Banks have been putting the squeeze on farmers even before today’s announcements by the Reserve Bank."
The Federated Farmers November 2019 Banking Survey showed farmer satisfaction with their banks continues to slide, and 23% of the more than 1300 respondents reported they felt under pressure from banks (up from 16% just six months earlier).
"With the average mortgage for all farm types being $3,833,000, and significantly higher for dairy farmers, even a small increase in interest rates hits hard," Hoggard says.
The Reserve Bank noted that the average return on shareholders’ equity for the four largest New Zealand banks are higher than those of banks in most other countries, including Canada, Australia, Singapore, Sweden and Ireland.
"Farmers are putting banks on notice," Hoggard says.
"We want to see fairness in how these costs of bank capital requirements are handled. Kudos to Rabobank, which has already indicated it will absorb the extra costs."
He said Federated Farmers was pleased the Reserve Bank has extended the transition period for meeting the higher capital ratios to seven years, from the original proposal of five years.
"We would have preferred 10 years, and we would have liked to see more analysis by the Reserve Bank on our sector given the vulnerability to farming of these proposals.
"Nevertheless, seven years gives banks enough room to not only maintain their current lending growth, but also to make dividend payments to their shareholders."
He said these changes made it even more important that the Farm Debt Mediation legislation is passed by Parliament next week at its third reading.