8 Apr 2019

Possible new rules for banks could hurt farmers - economist

10:47 am on 8 April 2019

New capital requirement rules proposed for banks could hurt farmers with large mortgages, according to the ASB bank.

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If banks are required to keep more money in reserve, they will face higher costs and will have to recover costs by charging higher interest rates.

The warning came in the latest Rural Loan Report from ASB senior rural economist Nathan Penny.

His comments follow proposals to make banks set aside more money for a rainy day.

"The Reserve Bank is proposing to increase banks' capital requirements," Mr Penny said.

"These requirements will increase bank funding costs and hence customer borrowing interest rates."

Mr Penny's comments came as the tide is shifting towards a possible cut in the benchmark interest rate, the official cash rate (OCR).

He said he feared the cost of implementing higher capital reserves could cancel out some of that OCR gain for farmers.

Three weeks ago, former Reserve Bank economist Ian Harrison said the cost of implementing the proposed higher level of capital reserves could be $1.5 billion a year.

He said that sort of money would be found by charging borrowers higher interest payments.

"A medium size business with a loan of $5 million could be paying $50,000 additional interest a year.

"A homeowner with a $400,000 mortgage could be paying an additional $1000 or more a year."

A survey in November by Federated Farmers found farms of all types had average mortgages that hovered above the $3m mark.

The survey said an average dairy farm mortgage was worth about $4.5m and 3.1 percent of dairy farmers had a mortgage of $20m.

According to Mr Harrison's figures, they could face a rise in interest payments of $200,000 a year.

The Reserve Bank first proposed its policy in December, saying safer banks equalled a safer society.

"When considering the level of capital to invest, shareholders do not take the societal impacts of bank failure into account, and thus banks have insufficient capital from a societal perspective.

"Placing minimum capital requirements on banks is a tool used by bank regulators to address this issue."

The Reserve Bank argued the dangers of banks having low levels of reserve capital relative to the risks they faced became clear during the Global Financial Crisis.

The proposed tightening of capital reserve rules is open for submissions until May.