Labour and Green politicians have been calling for an inquiry into the Big Four banks’ profit and interest margins, arguing the banks have not passed on the full effects of cuts to the OCR. But John Key doubts whether an inquiry could achieve anything. The real concern for the Govt is the stability of the banking system and whether the banks have adequate funds for lending. A senior Minister says “bank stability is our top priority.” The Govt is closely monitoring the situation because of a looming problem in NZ’s vital export sector, particularly in the dairy industry. The question is whether the financial bubble is about to explode.

While credit markets have been showing signs of improvement, and total lending has increased by about 6%, dairy farmers owe more than $27bn, or around 61% of total agricultural borrowing. The most indebted hold 75% of total dairy farm debt. This has been borrowed against the collateral of land values, but those values have fallen sharply in recent months. June is the month when most dairy farms are rolling over their loans. The Reserve Bank has warned banks about lending too much to the farm sector because of the risk of a significant fall in land prices, and put pressure on them over capital adequacy. The RBNZ says banks’ models are not generating sufficient capital. The Govt is concerned at the prospect of defaults and forced sales delivering yet another body blow to the export sector.

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