There’s no debating farmers are a vital part of the economic recovery journey for New Zealand, so it’s time they get the lowered interest rates they deserve.
Firstly, a bit of background.
The Reserve Bank of New Zealand (RBNZ) regulations stipulate that banks have to hold significantly more of their own capital in a farm loan than they do in a home loan. They put this differentiator in place after the significant run up in Agri debt prior to the Global Financial Crises (GFC) - as this, combined with the subsequent retraction in commodity prices, caused a near meltdown of the system.
Rightfully so, they wanted to prevent this from happening again. However, in hindsight, things never really panned out to be as bad as what they thought; whilst non-performing loans ran very high post GFC – they have improved considerably to where they sit today. Banks also didn’t experience the losses they all thought they might.
Sure, things aren’t perfect out there, but the risk that each bank was facing back in GFC times, versus in real time today is considerably different.
This graph below is a good illustration of the relative change in risk for the Agri lending sector over this period.
