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The latest financial stability report from the RBNZ brings back to the surface a hot topic for us and our farming and business customers – that being the significantly greater amounts of capital that the RBNZ requires banks to hold when they lend to a farmer or business versus a homeowner.
The main trading banks are required to hold vastly more of their own equity capital against a farming or business loan making those loans much less profitable to make. This leads directly to less lending and higher interest cost margins in those sectors versus home lending.
We warned about the flow of capital going straight to home lending back in 2020 when the RBNZ started its “Funding for Lending” and “Large Scale Asset Purchases” programmes (i.e printing money). You can find that article here.
Earlier, in this article, we actively called for RBNZ to proactively make capital changes to help the New Zealand Primary Sector.
It was clear back then that the RBNZ’s capital rules were (and still are) set up to encourage home lending and discourage farm and business lending.
So back to the latest report from the RBNZ
(you can find the full copy here)
Here are some direct quotes from that report:
“Overall, risks to the financial system from the dairy sector have diminished considerably in recent years”
“On average, dairy farmers have repaid around $3 of bank debt per kgMS in recent years”
“Total dairy sector debt has declined by around 12 percent ($5b) since its peak level in 2018”
“[On the Ukraine Crisis]… higher food prices should also benefit agricultural exporters. New Zealand’s dairy and meat stocks are predominantly pasture-fed, and should fare better than overseas grain-fed competitors”
The following graph, produced by the RBNZ, best shows the significant repayments made in the sector and the strong position they’re now in.