Reserve Bank capital changes fall short of expectations

Federated Farmers says changes to bank capital settings will save farmers some money, but don't go anywhere near far enough to make a meaningful difference or unlock economic growth.

The Reserve Bank has today announced the results of its review into bank capital settings, easing the amount banks need to hold as a buffer against losses.

Federated Farmers banking spokesperson Mark Hooper says while the changes will deliver some savings for farmers, they fall well short of expectations.

"There will be a lot of farmers out there who are incredibly disappointed the Reserve Bank hasn't gone further in winding back these outrageously high capital settings.

"New Zealand has some of the most conservative capital rules in the world, and unfortunately, today's announcement doesn't change that - it's just more of the same.

"I wouldn't go quite as far as saying we've been handed a lump of coal for Christmas, but it's probably the equivalent of unwrapping a new pair of work socks.

In 2019, proposed changes to the Reserve Bank's capital holding rules were estimated to increase lending costs for farmers by around 100 basis points.

This would have added an extra $40,000 in annual interest payments for the average Federated Farmers member.

"While today's announcement is a step in the right direction, the Reserve Bank has only walked back that huge increase by a measly 23 basis points," Hooper says.

"That means three-quarters of the extra and unnecessary interest payments remain."

With around $62 billion in agriculture debt in New Zealand, today's changes equate to $144 million being saved for the sector each year.

"That might sound like a big number but it could have been - and should have been - much more," Hooper says.

"Federated Farmers' regular banking survey of our members shows the average farm mortgage is around $4.9 million.

"Based on that, the average saving will be about $11,000 per farmer each year - a small number relative to their overall interest costs."

Federated Farmers has long argued the Reserve Bank's approach to capital settings is far too conservative - and unfortunately that looks set to continue.

"In 2019, the Reserve Bank tightened capital requirements - and those costs were passed straight on to customers," Hooper says.

"We've argued that the 1-in-200-year risk settings were overly conservative by international standards and didn't reflect the real risk of farming loans.

"Those settings have piled unnecessary cost and stress onto farming families.

"We're pleased the Reserve Bank has decided to lower the settings, but it's not enough to truly ease that pressure in rural New Zealand."

In its decision released today, the Reserve Bank said that although it was reducing capital settings relative to what it selected in 2019, its requirements remain relatively conservative when compared internationally.

Hooper questions the reason for that and says Federated Farmers will continue pushing for the bank to come more in line with international levels.

He says easing the capital settings further would result in wider benefits for the rural economy.

"When farmers are paying less in interest, they have more capacity to invest back into their businesses, into environmental protection, and into productivity," Hooper says.

"That's good for farming families, for rural communities and for New Zealand's economy as a whole.

"I hope the new Reserve Bank governor, Anna Breman, will separate herself from the poor decisions of her predecessors and show some real leadership by delivering some relief on borrowing costs.

"She has an opportunity to align New Zealand's capital settings with international norms.

"We'll keep pushing for the lowest possible borrowing costs for farmers, and for a banking system that properly reflects the realities of farming risk."