New rural lending rules take effect

The Reserve Bank’s new capital adequacy requirements for farm lending take effect today, requiring New Zealand’s four largest banks to hold more appropriate regulatory capital to back their rural lending portfolios.

The changes affect the risk weights used in regulatory capital calculations and mean the four big banks will have higher regulatory capital requirements than when the existing Basel II capital regime commenced in 2008.

The exact impact on each bank varies depending upon the make-up of their rural lending portfolio. Loans carrying lower risks attract lower risk weights.

Reserve Bank Deputy Governor Grant Spencer said the new risk weights are more conservative and reflect a more accurate assessment of risk.

“The new rules will ensure banks are better prepared for any extreme shock to the rural sector,” Mr Spencer said.

“The Reserve Bank expects the new average risk weight across these banks will be about 80 to 90 percent. This is an increase on existing risk weights. However, it is important to note that before 2008 – i.e., before the Basel II capital regime was introduced – this figure was 100 percent.

“The changes are expected to have only a minor impact on rural loan margins, as banks have already adjusted pricing considerably over recent years.”

The rule change affects only New Zealand’s four largest banks, also known as internal models (IM) banks, which use their own Reserve Bank approved models for determining minimum capital requirements.

All other banks use a standardised model and are subject to a risk weighting of 100 percent.

See this Q&A for responses to frequently asked questions about the rural lending rules (http://www.rbnz.govt.nz/finstab/banking/4436523.html).