The report is the latest indication of the Reserve Bank’s intentions for macroprudential tools to target asset price bubbles and enhance stability. Tools being considered include loan-to-value restrictions, counter-cyclical capital buffers and sectoral requirements.
Governor Graeme Wheeler said house prices increases were a risk to financial stability in New Zealand, and some borrowers were leaving themselves exposed to risk by taking out large loans with minimal deposits.
Banks were more willing to lend to customers with less equity, he said, leaving borrowers with higher debt levels relative to both their income and assets. That would leave them vulnerable to either a drop in incomes or a rise in interest rates.
“Given that interest rates are at historical lows and will likely rise in the future, lenders should ensure borrowers will be able to service loans even if interest rates rise substantially.”
The Reserve Bank said it would “soon” be able to use the macroprudential framework to tighten settings during periods of systemic risk. It said the tools were needed because the existing framework might not be enough to contain a build-up in risks during extremes in the credit cycle.
But as yet the Bank has not decided when they would be implemented.
“Macroprudential instruments would be used to help manage extremes in credit and asset price cycles, although the tools would need to be deployed early enough to ensure they would meet the intended objectives.”
The Bank agreed that macroprudential tools could result in borrowers going to non-bank lenders who were not subject to its rules, but said that would be mitigated by the fact the tools were only temporary solutions.
One of the most talked-about macroprudential tools is a restriction on loan-to-value ratios, to reduce the level of “risky” lending and reduce the house price momentum generated by people being able to borrow large amounts with small deposits.
Some commentators have said that across-the-board LVR restrictions would unfairly disadvantage first-home buyers and areas of the country where house prices are static.
But the Bank said exemptions were not necessarily appropriate and could dent the tools’ effectiveness. It said exempting first-home buyers would only be possible if first-home buyers were not the ones driving risky borrowing. Exempting by region might be possible but would present some practical difficulties.
The Bank said it was reviewing submissions it had received on the tools. “The next steps in the establishment of the macro-prudential policy framework are expected to include a Memorandum of Understanding between the Reserve Bank and the Minister of Finance. This will set out the objectives of the policy, the Reserve Bank’s powers to use macroprudential policy, an agreed set of policy instruments and governance and accountability arrangements. Following this, it is expected that the technical implementation details for each of the instruments will be incorporated into the Banking Supervision Handbook over time. This design process will draw on further consultation with the banks.”
