It has reported back on the results of its public consultation on proposed macroprudential tools and confirmed it is adding loan-to-value restrictions, a countercyclical capital buffer, and adjustments to the core funding ratio and sector capital requirements to its toolkit to counteract asset price bubbles and financial system instability.
It said the tools would be deployed only when necessary and it was hoped that sometimes simply a warning from the Bank that it was considering using the tools would be enough to curb problem credit growth.
Three submitters told the Bank that constraining the share of high-LVR lending banks were allowed would be more appropriate than restricting low-equity lending in general.
The Bank said it agreed that this was an appropriate way to allow banks to continue to lend to credit-worthy borrowers. “If we were to implement LVR restrictions, we would favour this approach in the first instance.”
But it said it would not discount blanket LVR caps.
And it said it expected LVR restrictions to be applied across-the-board, not targeted to investors or problem areas, as some submitters suggested. “Although LVR restrictions overseas have sometimes exempted first-home buyers, this might only be desirable if first-home buyers were not driving a substantial part of the high-LVR borrowing.”
It said targeting restrictions to regions was possible but would result in practical difficulties.
But it said it was not ruling out targeting restrictions if risks were found in particular segments of the market. “The Reserve Bank is currently requesting a breakdown of high-LVR housing lending from the banks by borrower type that may be used to help assess the pattern of high-risk borrowing in the housing sector.”
Banks would be given at least two weeks’ notice on restrictions on high-LVR lending, which some have said is not enough.
A number of other submitters said a debt servicing calculation would be better than LVR restrictions. The Reserve Bank said it was not ruling that out as a possibility in future.
Submitters told the bank that changes to core funding ratios, a counter-cyclical buffer or new sectoral capital requirements could result in higher lending rates but there were other factors that could negate their impact. “When competition is strong, there might be little pass-through to prices,” the Bank noted.
The Bank admitted that, apart from LVR restrictions, its tools would have a weak impact on dampening asset price bubbles. “It bears emphasising that the primary purpose of such tools is expected to be to build additional resilience in the banking system.”
