Stopping growth and sustainability – The Reserve Bank’s proposal
The Reserve Bank's proposal is to nearly double the minimum amount of capital (equity) that banks are required to hold as a mitigation to a banking crisis. The idea is the increased equity will help avert the crisis. The irony is that the increased equity requirements may cause a financial crisis.
Today $62 billion is on loan from the four main banks and Rabobank to the primary sector. According to analysis by KPMG, what the Reserve Bank's proposal will do is require these banks, due to the primary sector’s risk profile, to hold two to three times as much capital compared with residential lending.
The result will be that primary sector lending will decrease by between 15% and 25%, and the cost of lending will increase by 100 to 125 basis points. This will add $12,500 a year per $1 million of borrowing, if you can get the loan. Feedback is already indicating that the banks are tightening their lending to the primary sector even before this proposal is implemented.
Reduced lending at increased interest cost will paradoxically have the effect of reducing the value of productive rural land, which is part of the security for the banks' loans. In effect, this will reduce the lending even further putting a significant brake on primary sector growth. This is from the sector that is responsible for around 50% of New Zealand's export returns and from the sector that feeds New Zealand. In other words, the whole New Zealand economy will suffer from this proposal. It may also affect the health of New Zealand.
In addition, climate change’s impact is requiring the primary sector to make significant investment in research and development. Implementation of new technology on the farm will require new capital. Therefore another consequence of the Reserve Bank's proposal is that the adoption of mitigation techniques and technologies to meet climate change challenges will be less likely as funds will not be available to finance the required changes. Here the impact will be environmental and just financial.
Then there is the challenge of continuing to feed New Zealand carbon efficient, nutritious and healthy food. Already our ability to feed ourselves is under threat with houses replacing high quality land for growing fruit and vegetables, and Regional Councils making it increasingly difficult – if not impossible – to grow vegetables around New Zealand.
To meet the challenges of climate change and ensure that we can feed New Zealand, we need to be able to grow fruit and vegetables in as many locations as possible across the country, and that will take money. We need to take this approach to minimise transportation costs but more importantly, to insure ourselves against severe adverse weather events such as draughts and storms that are likely to stop production in some but hopefully not all of the country's regions.
So getting back to the Reserve Bank's proposal. It will not enable financial, environmental and social sustainability. It will actively promote the reverse. Therefore it is one proposal that I ardently believe should go no further.
Mike Chapman, Chief Executive