Source: Federated Farmers
Federated Farmers says the Reserve Bank’s decision to review bank capital rules is the first step towards lower interest rates and fairer access to finance for farmers.
“These capital rules have a direct impact on rural livelihoods,” Federated Farmers banking spokesperson Mark Hooper says.
“The stricter the rules, the more capital banks need to hold – making lending more expensive for borrowers like farmers.
“We welcome the Reserve Bank’s decision to consult on a number of changes to its capital settings.”
Capital rules determine how much money a bank needs to set aside in case a loan goes bad.
The current setting requires banks to hold enough capital to withstand a one-in-200-year shock, which Hooper says is overly conservative.
“That setting is one of the strictest in the world and it’s costing farmers an absolute fortune.
“Farming is an incredibly capital-intensive business, with most farming families relying on bank lending to pay for things like land, animals and machinery.
“When capital rules are set at such conservative levels, the banks pass on those extra costs and, ultimately, it’s farming families and smaller businesses that take the hit.”
Federated Farmers says higher capital requirements increase the cost of borrowing across the economy but that farmers, who carry higher debt levels, are disproportionately affected.
As it stands, the current capital rules are costing farmers up to $714 million each year in unnecessary interest charges.
“Every extra fraction of a percent on interest rates means tens of thousands of dollars more in interest payments for a farmer each year,” Hooper says.
“Farming businesses are collectively paying hundreds of millions of dollars in unnecessary interest costs, simply because of restrictive and overly conservative capital settings.
“Each extra dollar being spent on unnecessary interest is a dollar not being spent to grow the business, improve productivity, or make environmental improvements on the farm.
“It’s also a dollar not being spent in our rural communities, as that money gets sucked directly out of the local economy.”
Federated Farmers stresses that a strong banking system is important for the stability of New Zealand’s financial system – but the balance needs to be right.
“We absolutely support the need for stable and well-capitalised banks, but the pendulum has swung too far in the wrong direction and it’s now holding back economic growth,” Hooper says.
“New Zealand’s capital requirements are now well out of step with international standards, and that’s unfairly penalising our farmers and putting a real drag on the economy.
“This review is a real opportunity to reset the rules, so they protect financial stability without unnecessarily restricting credit or inflating borrowing costs.
“Farmers need fair and affordable access to capital if they are to continue driving New Zealand’s export economy.”
