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Farmers less happy with banks and RBNZ capital requirements signaled as a factor

Wednesday 5th June 2019

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Federated Farmers is pointing the finger at the Reserve Bank's proposed increase in bank capital requirements as more farmers feel under pressure and overall satisfaction with banks hit the lowest level since its first survey in August 2015. 

Satisfaction with banks has dropped over the past six months to 71 percent from 74 percent, with falls most apparent in the dairy and sharemilker farm groups, according to the bi-annual May survey conducted by Research First. There were 1,326 respondents. 

There has been a substantial increase in perceptions of bank pressure, with 16 percent of farmers perceiving they have come under undue pressure, up 5 percentage points on November 2018. Dairy farmers are feeling under the highest pressure since the survey began, as are arable and ‘other’ farms, it said  One in five dairy farms felt undue pressure; a 5-percentage point increase compared to six months ago. 

"This might seem counter-intuitive, given that dairy farmers’ incomes and profitability have been recovering since the 2014-16 downturn. Banks generally stood by their dairy clients during that time and allowed them to increase debt to get through. It’s not a surprise that banks want that debt paid down now that dairy returns are better," said Federated Farmers economics and commerce spokesperson Andrew Hoggard.

Federated Farmers said the Reserve Bank’s proposed increases in bank capital requirements is likely another factor behind the slide. Even though they are currently only proposals, Federated Farmers is hearing from members that banks are beginning to implement them and these changes will increase the cost of lending and will also make banks more conservative in their lending policies and decisions, it said.

The RBNZ's proposals include increasing minimum common equity tier 1 capital from 8.5 percent currently to 16 percent for the four major banks and to 15 percent for other banks.

According to Hoggard, banks are telling farmers the increases in bank capital will result in tougher lending conditions and higher interest rates for borrowing.

"The Reserve Bank’s very conservative stand on this is causing quite a bit of resentment," he said. 

Federated Farmers cited the NZ Bankers' Association's estimate that the Reserve Bank's proposals would cost the economy $1.8 billion, and included a statement from the banking lobby's chief executive, Roger Beaumont, saying there would likely be an impact on bank customers, depending on how each bank responds. 

In a submission on the central bank's proposals, Federated Farmers said while it agrees it is important for bank capital requirements to safeguard the financial system and the wider economy, it is "concerned about the impact that significantly increased capital requirements would have on farmers and the wider economy through increased costs of borrowing and tighter conditions for lending."

For some farmers, interest can be the largest single farm expense and, with agricultural debt now approaching $63 billion, a 1 percent change in interest rates is worth nearly $630 million per annum to farmers, it said. "Banks’ decisions can have a huge impact on farm businesses and farming families’ economic and social well-being," it said. 

As well as higher costs of borrowing, Federated Farmers also expects banks to become more conservative in their lending and to apply more restrictive lending conditions to both new and existing lending, especially for agricultural lending if the proposals are implemented. 

"While conservative lending is not necessarily a bad thing, a balance is needed to ensure that an overly risk-averse approach does not cause a credit crunch and that existing borrowers are not put under undue pressure, which would certainly not be good for their ‘wellbeing’," it said. 

It notes that farmers are already contending with major policy changes around things like freshwater management, climate change, employment relations among others and are already exposed to the ups-and-downs of the global economy and therefore commodity prices, interest rates and exchange rates; the vagaries of the weather; and the ever-present threat of weed, pest and disease incursions. 

"In the current climate, farmers do not need the added spectre of significantly higher borrowing costs and tougher lending conditions, especially when imposed on them by policy-makers," it said. 

It called on the RBNZ to do three things as a high priority.

First, the Reserve Bank needs to revisit its risk tolerance leading it to a ‘one in 200 years’ approach. "Risk can never be completely eliminated, even at great cost, and there will be a point where the added cost of reducing risk begins to outweigh the added benefits of the reduced risk," it said. Federated Farmers therefore considers a ‘one in 100 years’ approach to be more appropriate. 

Second, the Reserve Bank needs to commission independent economic research to narrow the range in cost estimates and to make specific estimates for housing, agriculture and business borrowing.

It should then apply the results to a macroeconomic model that will show the impacts on the national economy as well as sectors, including agriculture, and regions and assess them against the benefits of taking a more conservative approach.

Third, if after this additional work it decides it should proceed, the Reserve Bank needs to review the proposed transition period to ensure it allows enough time for the banking sector to meet any new requirements in a measured way that does not impose unreasonable costs on their customers and the economy. 

Last week, the central bank announced it had appointed three external experts to independently review the analysis and advice underpinning its bank capital proposals. 

The external experts are being asked to decide whether the problem that the capital review is seeking to address has been well specified and whether the Reserve Bank adopted an appropriate approach to evaluate and address it.

They are also being asked to review the inputs to the review and to decide whether the analysis and advice has taken into account all relevant matters, “including the costs and benefits of the different options.”

The Reserve Bank has committed to publishing all three independent reports.


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