Orr Warns Banks About Squeezing Farmers Before RBNZ Capital Hike

(Bloomberg) --

New Zealand central bank governor Adrian Orr suggested retail banks may be squeezing more money out of farmers in anticipation of higher capital requirements.

Banks had lifted lending rates in the agricultural sector even as the Reserve Bank lowered its official cash rate, meaning they are “significantly raising their margins,” Orr said in a speech posted on the RBNZ’s website Thursday.

“This is not a sign of long-term thinking when it comes to bank borrowing and lending, and it is not a sign of a highly competitive banking services in core sectors of the New Zealand economy,” he said. “We are monitoring this behavior, to assess the degree of any ‘front-loading’ of our capital proposals, and I encourage all customers to question their banks on issues of competition.”

The RBNZ is proposing that lenders be required to raise capital buffers so that they can better withstand shocks. In response, the biggest banks, which are all Australian-owned, have threatened to shrink or sell their New Zealand operations.

Orr said many of the large banks, after lending aggressively to households and the dairy sector during good times over the past decade, were now raising their lending margins and/or making credit much harder to access for some customers, especially those in the rural sector.

“Such bank activity is pro-cyclical, fair weather behavior that leads to misallocated capital, industry booms and busts, and larger economic hardship on broad society –- not the bank shareholders themselves,” he said.

The RBNZ’s proposals would see significant increases in shareholder capital in banks, which would force the owners to sharpen their long-term customer focus and reduce the chance of a bank failure, he said. “These outcomes are highly desirable for the long-term economic health of New Zealand, and should promote deeper and more liquid local equity and debt markets.”

The bank is due to finalize its decisions in early December and Orr said the transition to higher capital would be made at a sensible pace. “But we will be talking more and better quality capital.”

Monetary Policy

Most of Orr’s speech focused on monetary policy and the bank’s decision to cut its benchmark rate by 50 basis points in August, which took investors and economists by surprise. The RBNZ left rates unchanged yesterday but left the door open for further easing if needed.

Orr said the RBNZ is pleased with the outcome of the August decision to date, noting that “retail banks have passed lower lending rates to many businesses and consumers” and that the New Zealand dollar had declined. He said monetary policy remains an effective tool to stimulate economic growth and inflation, even with the OCR at an historic low of 1%.

He reiterated that the bank is “thinking hard” about unconventional policies, such as negative interest rates, in the event that it runs out of conventional ammunition. “Our current view is that we are unlikely to need ‘unconventional’ monetary policy tools. But we would be remiss not to be prepared,” he said.

Orr said New Zealand was well placed to “seize the opportunities and manage the challenges associated with the global low interest rate environment.”

“We are confident that rates will remain low for a number of years, providing a great environment to invest,” he said. “The good news for New Zealand, unlike many other OECD economies, is that our government’s books are in good shape, with room to expand investment, and there is already a strong fiscal impulse underway from public spending and investment. We have the trifecta of sound government finances, clear infrastructure demands and low hurdle rates for investing.”

To contact the reporter on this story: Matthew Brockett in Wellington at mbrockett1@bloomberg.net

To contact the editors responsible for this story: Matthew Brockett at mbrockett1@bloomberg.net, Tracy Withers

©2019 Bloomberg L.P.