These tools include placing restrictions on loan-to-valuation ratios (LVRs) - for example, allowing bank to lend no more than, say, 80% of a property's valuation - forcing banks to hold set percentages of more expensive deposit funding or longer-term wholesale funding and altering the amount of capital banks are required to hold against loans on specific assets such as houses or farms.
LVR restrictions could act as a brake on credit growth during a boom and have the advantage of being imposed and enforced relatively swiftly, Reserve Bank governor Alan Bollard told a conference on banking regulation in Sydney last week.
A number of different tools might be used in tandem and their potency could be enhanced by a 'moral suasion' effect as well as their direct impacts, he said.
"The deployment of any tool would send an important signal to financial institutions, investors, rating agencies and the general public about the central bank's unease about rapid credit growth."
They could also mean short-term wholesale interest rates won't rise as much and therefore reduce the attractiveness of the New Zealand dollar to international investors seeking to take advantage of the relatively high interest rates New Zealand has had in the past.
That would be "of benefit to a small open economy such as ours in terms of reducing exchange rate volatility," Bollard said.
Still, "we must be careful about unintended consequences," as well as the costs of such measures, he said.
In particular, some measures have the potential to damage financial system efficiencies and might cause borrowers to seek other channels other than the banks in order to avoid such restrictions, he said.
Such policy tools aren't a panacea for macro-economic imbalances such as the tax distortions which contributed to the last housing market boom and which were addressed in the government's last Budget. Bollard said the central bank was "strongly supportive" of those tax changes.
