Dairy Holdings, Fonterra's biggest supplier-shareholder, has warned of a "perfect storm" developing if the Reserve Bank's capital adequacy proposals go ahead in their current form, and said some banks were already charging a margin in anticipation of the change.
The family-owned company, which has 75 farms in the South Island and 50,000 cows, has made a case for the new rules being introduced over a longer time span than the proposed five years, or with at least an option to extend the time period if required.
"Dairy Holdings sees significant risk in the perfect storm materialising where banking margins increase markedly (100 basis points-plus) due to extra capital costs and customer risk ratings increases, bank sector reduction in appetite stifles ability for growth and liquidity in the land market and a milk price shock causes massive deterioration in all asset values," the company said in its submission.
Dairy Holdings, which has former Fonterra director Colin Armer on its board, said it was imperative that the Reserve Bank ensured trading banks continued their drive to strengthen agri-sector businesses through improving their profitability.
The debate has centred around what level of capital is appropriate for New Zealand banks to hold to achieve the goal of withstanding a one in two-hundred-year crisis.
The Reserve Bank is proposing a lift in the amount of risk weighted capital retail banks hold, from 8.5 per cent to 16 per cent, to be phased over five years.
In other rural submissions, Dairy NZ, Fonterra and Horticulture New Zealand did not support a change.
The Reserve Bank has said that interest rates for borrowing and lending could change – but not by much - just 20 to 40 basis points.
But in its submission, Dairy Holdings said all the major trading banks had indicated directly to the company that they intended to fully pass onto the customer all the increased cost associated with the move.
"In fact, some trading banks are already enforcing a lift of up to 50 basis points onto fixed-term loans and margins above wholesale floating rates as existing facilities mature over, above what they were charging prior to the capital adequacy debate starting," it said.
"Banks have seized the opportunity to increase margins before the submission period has closed and well before any costs are incurred on their behalf," it said.
"The increase in margin already being charged is significantly above that signalled by Reserve Bank," it said.
Dairy Holdings recommended that the Reserve Bank provide guidance to the banking sector as to how he increased cost of capital is to be apportioned "in a fair and equitable manner".
Reserve Bank has said the competitive market would continue - if one bank pulled back in a particular segment of lending, another would step up.
Dairy Holdings said its observation over time was "quite the opposite" and that banks very much followed each other's lead.
"It is understandable that banks operate this way as they all operate under the same macro influences," it said.
These have historically been milk-price related or aligned with offshore capital availability.
The company also said a lack in profitability in a section of the dairy industry and a material reduction in bank-sector appetite had resulted in weak liquidity in the dairy-land market.
On Monday, ANZ group chief executive Shayne Elliott has threatened to review the "size, nature and operations" of the New Zealand business if the Reserve Bank implements its proposed changes to capital ratios.
The capital changes would see ANZ - New Zealand's biggest rural lender - reduce investment and reallocate resources away from New Zealand to more profitable businesses, Elliott said in his submission.
Dairy Holdings is owned by three New Zealand family groups, being the Armers, Turleys and Wallace Group.