By Federated Farmers General Policy Manager Nick Clark
OPINION: No one wants another global financial crisis.
No one wins when the banking system fails.
The problem, though, that societies face is that the world of economics is largely based on theories and modelled scenarios and that policies are often put in place to fight the last war rather than what might be coming down the track.
Another problem is that policy-makers are increasingly risk-averse - even at the expense of imposing significant costs.
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Put the two together and we have a real challenge. To help reduce the risk of a banking crisis, the Reserve Bank wants to tighten up on bank capital requirements.
I am for anything that can protect our economy and enable it to weather storms but we also need to think about the costs.
The Reserve Bank's consultation paper is called, 'How Much Capital is Enough?' and people have until May 3 to respond to its proposals.
In a nutshell, what the Reserve Bank is proposing to do requires banks to hold significantly more high-quality capital to levels that would make New Zealand one of the most conservative in the world.
We are a tiny nation in the Pacific that relies largely on the primary industries and tourism to keep it afloat. We are not pulling rocks out of the ground on a large scale and, excluding meat and dairy processing, we do not have a big manufacturing sector.
We are but a few small, thinly populated islands at the end of the world, susceptible to global economic forces, weather and biosecurity incursions our banking system does need to be safe for our wellbeing.
Yet nothing is costless, and there has been much debate in financial circles on how much capital actually is enough and what the costs might be. Do we really need to protect our banks from a one-in-200-year event? And if so, will the $20 billion cost to the banks be worth it - especially if it is recouped through increases in lending interest rates or by toughening their lending conditions?
Given the $63 billion of debt held by the agricultural sector, an increase in lending rates or tougher conditions would be most unwelcome - especially when it comes on top of other challenges being faced by farmers like water, climate change, biodiversity, employment, immigration and, of course, the spectre of a capital gains tax and environmental taxes.
As well as causing considerable stress, these are also hammering farmers' sense of what is fair.
Federated Farmers will be making a submission on the Reserve Bank's proposals and I hope they take our points into consideration. The points are in line with making sure everyone is kept safe, but not at any price.
We want the Reserve Bank to revisit the proposed increases in bank capital to ensure an appropriate level of risk tolerance is chosen, a robust and independent cost-benefit analysis is undertaken, and transitional arrangements allow for a more measured, gradual pace of change, thereby easing costs of getting to desired new levels for bank capital.
Otherwise, we might well reduce the already very small risk of bank failure but the everyday cost to us all mightn't be worth it.
Nick Clark is Federated Farmers' General Policy Manager.
