Comment: Federated Farmers is worried how proposals the Reserve Bank is considering will affect farmers, writes General Policy Manager Nick Clark.
Who wants to pay more interest on their mortgages? This isn't an academic question.
Proposals the Reserve Bank is considering will have real world impacts on banks and bank customers.
Recently submissions closed on its plans for big increases in the capital banks have to hold.
The Reserve Bank justifies its proposals as protecting us from the impacts of a severe one-in-200 years banking crisis.
Our banking regulation will become among the most conservative in the world and will cost the banks around $20 billion to implement over five years.
Although banks are very profitable and certainly shouldn't be let off the hook it's inevitable they, like any business, will seek to recoup at least some of the increased costs from their customers in the form of higher lending rates and lower deposit rates.
Banks will also become stricter in their lending conditions and how they allocate lending to sectors.
The Reserve Bank reckons the cost increases will be minimal at only around 20 to 40 basis points (or 0.2 per cent to 0.4 per cent on interest rates).
Yet other market commentators have suggested much higher costs, as high as UBS's 80 to 125 basis points and Macquarie's 90-140 basis points.
Some have even suggested the impact will be bigger (eg 200 basis points) on perceived riskier sectors like agriculture.
Whether that's an acceptable price to pay will depend on how likely it is we'll have a severe banking crisis and of course whether the higher capital requirements will actually prevent one.
New Zealand hasn't had many banking crises, with the 1990 BNZ crisis the most recent and cost the Government hundreds of millions to bail out.
More recently, and unlike many countries, our banks got through the Global Financial Crisis unscathed, although admittedly that wasn't the case for finance companies.
There's no doubt a severe banking crisis would be traumatic but would reducing the small risk of one be worth the ongoing costs of the Reserve Bank's insurance policy?
The Reserve Bank clearly thinks so but others are not so sure. The economic consultancy Sapere did an analysis for the NZ Bankers Association and found the economic costs will exceed the benefits by at least $1.8 billion per year and probably a lot more.
And Sapere also found the impacts will fall disproportionately on agricultural and small business lending and on savers.
Based on feedback from our members, for some indebted farmers the annual additional interest cost could be well in excess of six figures.
The banks could also ration credit away from farming due to perceived risk.
Some farmers could be put into severe distress but even those that aren't will have less to spend in their local economies and will find it harder to invest in measures to make their farms more environmentally sustainable.
This at a time when farmers are facing tougher environmental policies, including on water, biodiversity, and climate change and associated expectations to cut production and spend up on mitigation measures.
So we're worried about these proposals.
In our submission and subsequent engagement with the Reserve Bank we've asked it to do three things:
1. Rethink its one-in-200 years risk tolerance and take a less risk-averse approach which will reduce the increase in capital required for the additional costs on banks and their customers.
2. Undertake a robust and independent cost-benefit analysis, including on sectors like agriculture.
3. Adopt a longer transitional period allowing for a more measured, gradual pace of any change.
The Reserve Bank now has the next few months to get its proposals right. We hope it takes that time to carefully digest the feedback and do the further work we've asked of it.
Otherwise this could be a case of the cure being worse than the disease.