RBNZ capital requirements will hurt farmers, small businesses

“The Reserve Bank’s requirement for banks to hold more capital will act as a handbrake on the economy at a time of serious uncertainty”, according to ACT Leader David Seymour.

“The move will increase borrowing costs and reduce lending, putting even more pressure on farmers and small businesses.

“A cost-benefit analysis done by former Treasury Secretary Dr Graham Scott argues the proposals will impose significantly higher costs on the economy than it will deliver in benefits.

“Dr Scott’s analysis suggests the policy will cost households and the economy $1.8 billion each year. The move will reduce economic output by $2.7 billion a year – through higher interest rates and lower firm investment – for a hypothetical benefit of $900 million.

“Costs will be imposed unequally. Riskier borrowers, such as farmers and SMEs, will face a disproportionate increase in interest rates and a reduction in lending. By impacting particular sectors disproportionately, the impact of these proposals will be inequitable.

“The irony of the Reserve Bank’s proposals is that, by putting pressure on sectors such as farming, it risks putting people out of business and contributing to the instability it is supposed to be fixing.

“Another unintended consequence is that it may force borrowers to rely on non-bank lenders. This risks creating a larger unregulated shadow banking industry, setting up a collapse reminiscent of the finance company collapses a decade ago.

“Our banks are already well-capitalised by international standards. The proposals are a solution looking for a problem. If the Reserve Bank forces businesses and farms under, it may well find the very problem it was seeking to solve.”

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