Impact of bank rules on farm lending rate exaggerated: RBNZ

Article – BusinessDesk

June 30 (BusinessDesk) – New rules requiring New Zealand banks to carry more capital for rural sector lending will have little effect on interest rates to farm borrowers, since banks have already increased their interest rate margins to reflect growing …

Impact of new bank rules on farm lending rate exaggerated, says RBNZ

June 30 (BusinessDesk) – New rules requiring New Zealand banks to carry more capital for rural sector lending will have little effect on interest rates to farm borrowers, since banks have already increased their interest rate margins to reflect growing risks in the sector, the Reserve Bank says.

The new capital adequacy rules, unpopular among the major banks, come into effect from tonight and are part of the RBNZ’s response to the aggressive lending practices that caused a mid-2000’s boom in rural property values, especially for dairy land.

“There is no doubt that banks regard regulatory capital requirements as factors that influence the bank’s cost of capital … at least when they reflect regulatory perceptions of risk that are not shared by banks … can influence the pricing of loan products,” the central bank says in its latest quarterly bulletin.

“There is, however, good reason not to overstate the likely effect.”

During what the bank calls the “boom years”, lending was aggressively priced to gain market share, but rural lending behaviour had changed “materially” more recently to be “much more cautious.”

“That change, entirely a market phenomenon, appears to have led to an increase in the average lending margin on rural loans,” the article says.

In accompanying statement, the RBNZ deputy governor Grant Spencer said: “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 changes apply only to the four largest banks – ANZ/National, Bank of New Zealand, Westpac and ASB – which were previously permitted to use their own risk management modeling to determine risk weighting for rural lending.

(BusinessDesk)

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