Opinion: Reserve Bank predicting risk could increase costs for farmers

Federated Farmers Vice President Andrew Hoggard. Photo / Supplied

Comment: The Reserve Bank's proposed changes to minimise the risks of bank failure has farmers concerned about potential costs, writes Federated Farmers vice president Andrew Hoggard.

People have to realise a cost increase, no matter how small, can be adverse to any business.

Next week we are off to talk to the Reserve Bank about the potential impact of some of its proposed changes to minimise the risks of bank failure.

The Reserve Bank is proposing changes to bank capital requirements, which will require banks to hold more capital than they do now.

It wants to make the banking system safer and to protect New Zealanders from a "one in 200 year" bank failure.

Read more from Federated Farmers here.

The ol' email and 0800 line has been running hot with farmers expressing their thoughts on the potential costs coming their way.

Some farmers have said good on the Reserve Bank for making banks be more conservative, but the majority are worried about the increase in costs on their businesses.

It's another cost that will have to be factored in on other costs such as council rates increases, higher compliance costs, and the general cost of living.

The consequence of what the Reserve Bank is proposing is that banks will have to build up their capital over the next few years, which could cost the banking sector around $20 billion.

While our banks are very profitable, it is inevitable that at least some of the additional cost will be recovered from customers and this will likely result in higher interest rates for borrowing (and lower interest rates for deposits).

There is a wide range of forecasts for increased in interest rates, ranging from the Reserve Bank's 20-40 basis points (ie, 0.2-0.4 per cent) to UBS's 125 basis points (ie, 1.25 per cent).

In real terms, that means an individual farmer with low debt may face an interest cost increase of a few thousand dollars per year, but at the other end some more heavily indebted farmers could face interest cost increases of more than $100,000 per year.

Agricultural debt is around $63 billion so we know that every 100 basis point increase in interest rates will increase the agricultural sector's interest costs by $630 million per year.

We also expect banks to become more conservative in their lending conditions.

What Federated Farmers want from the Reserve Bank is a more appropriate level of risk tolerance is chosen; a robust and independent cost-benefit analysis is undertaken; and transitional arrangements allow for a more measured, gradual pace of change, thereby easing costs of getting to desired new levels for bank capital.