By Bernard Hickey The Reserve Bank of New Zealand has confirmed it has delayed the implementation of new capital adequacy rules for rural lending by six months until the end of December after banks expressed concerns it could significantly increase lending costs for farmers. "We have extended it out to allow a fuller analysis of the implications," a Reserve Bank spokeswoman told Interest.co.nz. She added this would include stress testing of how the rules may affect the banks and lending. Rural lenders at the major banks were informed by the Reserve Bank by letter earlier this month that the implementation of the tougher rules for rural lending had been extended until the end of December from the initial plan for a June 30 introduction. The rules have not been published, but Interest.co.nz understands they would have required banks to assume higher levels of defaults for rural loans and put aside more capital to back those loans. Bankers said the changes would have increased lending costs by between 30 to 50 basis points. The Reserve Bank flagged the changes in its November 2009 financial stability report (Page 45).
In addition to concerns with the banks’ modelling of housing loans, the Reserve Bank also has concerns regarding the treatment of rural exposures under the banks’ models. The Reserve Bank is concerned that the current treatment is ‘procyclical’: the models tend to see farm lending as unrealistically safe during upswings, but during rural downturns like the current one they produce much higher risk weights that could overly constrain lending. The Reserve Bank has proposed changes that should produce assessments of rural lending that are more ‘through the cycle’ in nature. The Reserve Bank has consulted industry on these changes and expects to implement the revised requirements in mid-2010, to allow for a reasonable transition period.Reserve Bank Deputy Governor Grant Spencer commented on the bank's core funding ratio policy in the news conference after the release of the report (from 10 minutes 49 seconds) and on the agricultural lending rules (from 19 minutes 45 seconds). This was first published this morning in our Daily Banking and Finance newsletter, which is for our paying subscribers. Find out more here.