July 1, 2019 / 3:11 AM / 4 months ago

NZ's proposed bank capital hike to hurt agriculture sector, small businesses

WELLINGTON, July 1 (Reuters) - A proposal by New Zealand’s central bank to raise capital ratio requirements for banks would impact the agricultural sector and small businesses the most due to rising borrowing costs, top lenders and others said in feedback on the plan.

As part of its broader measures for the financial industry, the Reserve Bank of New Zealand (RBNZ) has proposed raising top banks’ capital ratio to 16%, indicating the country’s top banks could collectively have to raise NZ$20 billion ($13.43 billion) over the next five years, which could push up borrowing costs.

A summary of the submissions released by RBNZ on Monday showed that banks and business groups have questioned whether the proposed increases in capital ratio were “too large and too costly”.

A number of submissions said the proposals could disproportionately impact particular sectors of the economy, either by increasing lending costs, reducing credit availability, or both.

“Highlighted sectors include the agricultural, commercial, and SME sectors. It is also suggested that credit leaving these sectors would likely move to the New Zealand housing sector, which may increase concentration risk for the system,” said RBNZ’s summary of the submissions.

Increased borrowing costs would increase financial stress at a time when the agricultural sector is already facing significant pressures to de-leverage and respond to environmental issues, the submissions said.

RBNZ said cautious reaction from some was expected, but many, particularly the general public, supported higher capital requirements for banks to reduce risks in the event of any major shock.

“We think the costs of doing so are outweighed by the benefits - someone’s cost is for society’s broader benefit,” RBNZ Deputy Governor Geoff Bascand said in a statement accompanying the summary of submissions.

The RBNZ is reviewing submissions on the proposal and is due to announce its decision in November. Implementation of any new rules will start from April next year.

Australian lenders ANZ Bank, Commonwealth Bank , National Australia Bank and Westpac dominate the New Zealand banking sector and would be most affected by these new regulations.

Some said the proposal requires the banks to have levels of capital well above other jurisdictions, and that the Reserve Bank’s own stress tests show that New Zealand’s banking system is already safe enough.

Many submitters requested that the banks be provided with more than the proposed five years to meet the new requirements. ($1 = 1.4896 New Zealand dollars) (Reporting by Praveen Menon; Editing by Kim Coghill)

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