Today’s announcement of the Reserve Bank of New Zealand’s decision on capital lending will have a significant impact on small business and rural-based sectors, according to Canterbury Employers’ Chamber of Commerce Leeann Watson.
The proposal by the Reserve Bank was to increase the amount of capital that must be held by banks, to strengthen their position and reduce the risk of failure – with banks holding 20 to 60 per cent more capital. The proposal has been accepted in a decision announced today by Governor of the Reserve Bank of New Zealand Adrian Orr.
Watson says the decision represents a significant potential threat to the economic stability of small businesses and the rural sector, as well as the wider economy.
“This decision means that Aotearoa New Zealand’s main four banks could have to obtain around $15-$20 billion from offshore investors, which is a significant amount when you compare the total capitalisation of the New Zealand sharemarket at around $150 billion.
“For local businesses on the ground, there is a very real threat that the potential multi-billion-dollar costs will be passed on to customers, not shareholders – and that this would adversely impact businesses that just aren’t in a position to absorb that kind of hit.
“The additional costs to borrowers could make lending more expensive and more unobtainable for those businesses already struggling to access capital. The cost of credit for those businesses able to access lending would also likely increase.
Watson says this is a return to earth for small businesses in the same week as the release of the Small Business Council’s The New Zealand Small Business Strategy, which included access to finance as one of its key target areas.
“These businesses are already working through numerous Government policy changes as well as the day-to-day challenges of operating a business – not to mention key global disruptors such as climate change and the future of work – so they need the confidence that their banks will continue to support them; this decision could significantly impact that confidence.
“We are concerned about the pace of change for those businesses that will be impacted and will continue to work with the local business community to help ease that transition period.”
Meanwhile, Federated Farmers is urging the trading banks to absorb as much as possible of the additional costs of new bank capital requirements rather than dump it all on customers, and especially on under-pressure farmers.
The Reserve Bank has estimated the impact of the required lift in total capital to 18 per cent for the four large banks and 16 per cent for remaining smaller banks (from a current average of 14.1 per cent) will be a 0.2 per cent increase in average bank lending rates.
“But the impact on farming is likely to be much higher,” Federated Farmers commerce spokesperson Andrew Hoggard says.
“This is because there is less lending competition in the agricultural sector and we know banks are already looking to reduce their exposure to farm debt. Banks have been putting the squeeze on farmers even before today’s announcements by the Reserve Bank.”
The Federated Farmers November 2019 Banking Survey showed farmer satisfaction with their banks continues to slide, and 23 per cent of the more than 1300 respondents reported they felt under pressure from banks (up from 16 per cent just six months earlier).
“With the average mortgage for all farm types being $3,833,000, and significantly higher for dairy farmers, even a small increase in interest rates hits hard,” Hoggard says.
The Reserve Bank noted that the average return on shareholders’ equity for the four largest New Zealand banks are higher than those of banks in most other countries, including Canada, Australia, Singapore, Sweden and Ireland.
“Farmers are putting banks on notice,” Hoggard says. “We want to see fairness in how these costs of bank capital requirements are handled. Kudos to Rabobank, which has already indicated it will absorb the extra costs.”
Federated Farmers is pleased the Reserve Bank has extended the transition period for meeting the higher capital ratios to seven years, from the original proposal of five years.
“We would have preferred 10 years, and we would have liked to see more analysis by the Reserve Bank on our sector given the vulnerability to farming of these proposals.
“Nevertheless, seven years gives banks enough room to not only maintain their current lending growth, but also to make dividend payments to their shareholders.”
These changes make it even more important that the Farm Debt Mediation legislation is passed by Parliament next week at its third reading.