The Reserve Bank is talking to the trading banks about doubling the minimum amount of capital they must hold against their loans so they can withstand losses from a one-in-200 year economic crisis.
That led the country’s largest rural lender ANZ in April to warn its farming clients the costs to the banks of the proposals could be passed on in higher interest rates. It urged them to reduce debt and reassess any future borrowing.
The Australian-owned banks also face a potential double-whammy with the internal model approach for calculating the amount of capital they hold against their loans also up for review.
Using their own models enabled them to lend with less capital than their smaller rivals in the past.
Reserve Bank governor Adrian Orr last month hit back at suggestions from the Australian-owned banks that the changes could force them to tighten up on rural lending.
He said if they did then it would have nothing to do with proposed hikes in capital minimums and more to do with a change in their appetite for rural debt amid dairy prices past their peak and rising farm costs.
Orr said New Zealand banking is a competitive market and urged farmers to shop around.
Rabobank NZ’s chief executive Todd Charteris said the bank has no intention of pulling back lending.
“It is an important market for us and our ambition will not change regardless of what the regulator wants.”
Since its entry into the NZ market in the 1990s Rabobank has built its loan book to $12 billion or about 17% of the total rural lending market.
That was funded entirely through profits retained from the NZ operation.
However, the potential need for significantly more capital has led it to sound out its Dutch parent for a top-up.
“We have had discussions around the board table, which has shareholder representation on it, and the shareholder is absolutely committed to this market.
“Once we know what the rules are then we are not averse to putting more capital in if we need to, given our ambition in this market.”
However, Rabobank is not interested in taking on the dud loans of other banks.
“We think we are 16-17% market share and we have ambition to grow that but we want to grow that in a sustainable way.
“It has got to sit within our risk appetite.”
Charteris said while the Reserve Bank’s proposals are designed to make the banking system safer they could undermine its stability if taken too far.
“NZ enjoys a really well banked and stable sector here and to be honest to disrupt that too much could have a real impact.”
Orr has rejected suggestions the proposals could spark a run on the value of farms.
The proposal
– Reserve Bank wants to increase capital held by big four banks from 8% to 16% within five years.
– All other banks will need to hold capital equal to 15% of all loans over same period.
– Banks say rural loans already lowest-returning because they have to hold comparatively more capital per dollar lent compared to residential mortgages, which are seen as less risky collateral.
– Australian-owned banks say further increases could lead shareholders to reassess their commitment to the New Zealand market and rural lending in particular.
