Rising credit costs on the way for Dutch farmer

Dutch agriculture will probably be hit in the wallet by the introduction of the so-called Basel 4 regulation. This means that banks are going to finance differently, whereby the collateral weighs less heavily in the risk profile of a company. Although this - rather complex - matter has not yet been enshrined in European legislation, the credit costs for farmers will increase one way or the other.

In short, Basel 4, the framework in which capital and credit requirements are agreed worldwide, means that individual banks in Europe are given less freedom in making internal financing models. This will have major consequences for the way in which banks deal with the provision of capital. "For Dutch banks, the consequences can be particularly severe," said Bas Brouwers, vice chairman of Dutch Banking Association (NvB) and also CFO at Rabobank† He said this at a technical briefing by the NvB about the consequences of Basel 4.

European Standardized Approach to Risk Profile
At first sight, why the effect is greater for Dutch banks than for lenders in Southern Europe is rather cryptic. Dutch banks have built up a relatively large amount of collateral in their capital grants, but it is precisely here that the shoe pinches. Because Dutch banks have traditionally financed on security, under current legislation (based on internal models) they need to maintain less high capital buffers than Basel 4 will soon require. "The higher the collateral, the more certainty a bank has that the loan will be paid off," said Brouwers.

Basel 4 will prescribe a standardized approach for banks in Europe from 2027 when considering financing risks. These are higher than Dutch banks usually use now. In short, this means that banks will soon have to maintain more buffers. Basel 4 will put pressure on the profitability of Dutch banks, because the profits have to be used to build up buffers. 'Profitability is then not self-evident', says Brouwers. Banks will probably solve this by passing on higher credit costs to their customers.

Agriculture is especially affected
Agriculture is specifically mentioned by the NVB as a sector that will be strongly affected by the regulations. Just like housing and the energy sector. Dutch farmers and horticulturists have traditionally financed strongly on collateral through fixed-value assets in the form of agricultural land and greenhouses, but that will soon weigh less as security. This is a setback, according to the NVB, because it is precisely in these sectors that a sustainability transition is taking place, which often depends on outside capital.

The proposal for the European legal anchoring of Basel 4 is expected this year. The European Parliament and the European Council must then approve the proposal. Agreements have been made that this must be done before 2023, but that is unlikely, according to Onno Steins, senior advisor at the NvB. There is a lot of resistance, especially from the north-western European countries such as Germany, Denmark and France. Although Basel 4 may still change the content, the contours are more or less fixed. One way or another, Dutch farmers may soon be confronted with higher financing costs, Brouwers expects. The Nvb says it is doing everything it can to bend the upcoming Basel 4 rules in favor of the Netherlands. 

Wouter Job

Wouter Baan is Head of Meat & Dairy at BoerenbusinessAt DCA Market Intelligence, he focuses on dairy, pork, and meat markets. He also monitors (business) developments within agribusiness and interviews CEOs and policymakers.

w.baan@boerenbusiness. Nl

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