Estimates of the impact on interest rates range from the Reserve Bank’s own stab of 20 to 40 basis points up to the 120 bps estimated by the local arm of Swiss investment bank UBS, Federated Farmers says.
Multiplied across the agricultural sector’s $63 billion debt pile that would see farmers slugged for anywhere between $120m and $800m in extra interests costs annually.
“For farmers an increase in costs along the lines of the Reserve Bank’s modest estimate would be unwelcome enough while the worst-case scenario would be devastating,” the federation wrote to the Reserve Bank.
The bank wants trading banks to increase the minimum amount of capital they hold against loans from 8% to 16% within five years.
The increase is designed to ensure the banks have the capital needed to survive the write-downs on loans the Reserve Bank estimates would come with a one-in-200-years downturn.
Officially, the cost to the banks of meeting the new capital minimums is being put at $20b but banking sources believe it could be billions more.
Westpac NZ chief executive David McLean said shareholders in the banks’ Australian parent companies will not stump up that sort of money unless they can see a return.
In all likelihood that means interest rates would have to rise to offset the decrease in returns that would come with holding higher amounts of capital against the same amount of lending.
“We think the middle of that 80 to 120 basis points range is where it might come out but that is an average across all lending and it may fall differently across different portfolios of lending,” McLean said.
The increase is likely to be at the higher end of that range for agricultural lending because of the higher risk weighting applied to lending against farms, which historically experience bigger ups and downs in values and are seen as a riskier form of security than houses.
Because agricultural lending soaks up more capital per dollar lent the returns are lower for the banks’ shareholders relative to other types of lending where less capital is required.
If the banks cannot raise sufficient capital to meet the new requirements, lower-returning farm loans will be the first in line to be cut back.
However, McLean said all the Australian-owned banks have large exposures to farm lending and it is not in their interests to cut lending savagely and spark a run on land values.
“We are not going to do things that hurt our farming clients or the industry and ourselves as well but having said that if this policy goes through it will put us in a very, very difficult position.”
Federated Farmers spokesman Andrew Hoggard said the size of the interest rate increases being bandied about would severely curtail farmers’ capacity to improve their properties to meet increased environmental regulation or to simply make them more productive.
The most indebted could be tipped up completely.
“We are probably lucky that we are in a period of reasonable commodity prices at the moment but that could change very quickly and an increase in rates like that could be enough if prices went backwards to force some farmers into some pretty tough times or even forced sales.”
Recent debate over the Government’s Tax Working Group proposals had overshadowed those from the Reserve Bank even though they have the potential to be far more far-reaching in their impact and costly to the economy than a capital gains tax.
But unlike the capital gains tax proposal it looks unlikely the Government will pull the handbrake on the Reserve Bank’s plans.
A spokesman for Finance Minister Grant Robertson said the central bank does its business independently of the Government and the increases in capital being proposed do not require it to sign them off.
However, National Party finance spokeswoman Amy Adams said that is a cop-out.
“This is not the Governor of the Reserve Bank acting in his rightly independent role as controller of monetary policy … it is him acting as a regulator of the banks and in that role he should expect the same sort of oversight that any regulatory agency would expect.”
The central bank had failed to come up with a robust cost-benefit analysis, she said.
Without that it is possible the proposals will end up costing taxpayers more in higher borrowing costs than the benefit of protection from bank bailouts that are very unlikely to happen.
“The impact for farming is potentially significant and at the very least the Minister of Finance should be asking the Governor exactly what the cost is going to be and why he thinks it is necessary.”
