RBNZ is consulting on the reinstatement of loan-to-value ratio (LVR) restrictions on residential mortgage lending from March 01, 2021. LVR restrictions set a ceiling on the percentage of new mortgage lending banks can offer at high LVRs. RBNZ intends to reinstate the LVR restrictions at the same level as before the onset of COVID-19, when the ceiling had been set at a maximum of 20% of new lending to owner-occupiers at LVRs above 80% and at 5% of new lending to investors at LVRs above 70% (after exemptions). The consultation paper also presents an initial analysis of the likely impact of reinstating LVR restrictions. The consultation period ends on January 22, 2021. RBNZ expects to release the final decision in February 2021, along with a summary of the submissions received and a regulatory impact assessment.
LVR restrictions were removed in April 2020 to best ensure that credit could flow and to avoid an adverse impact on the mortgage deferral scheme implemented in response to the COVID-19 pandemic. Reinstating LVR restrictions from March 01, 2021 will give banks time to clear their existing pipelines of high LVR loans that have been approved but not yet settled. In practice it is likely that new high-LVR lending will decrease well before the reinstatement date as banks prepare for the introduction of new restrictions. The proposed policy change would be enacted by re-introducing section BS19 of the Banking Supervision Handbook (Framework for restrictions on high-LVR lending). This will require a change to banks’ Conditions of Registration. If the decision to reinstate LVR restrictions is confirmed, RBNZ will run a short consultation (minimum seven days) on the required changes to Conditions of Registration to implement the LVR restrictions.
LVR restrictions are one of the macro-prudential policy tools of RBNZ. The LVR restrictions on residential mortgage lending support financial stability, by building financial system resilience against a disorderly correction in the housing market and by dampening excessive growth in credit. By placing limits on high-risk lending, LVR restrictions can make household and bank balance sheets more resilient to a correction in property values if that occurs. This, in turn, can help avoid a negative feedback loop emerging in the housing market. In this situation, an initial correction causes some borrowers to move into negative equity, which then incentivizes further "fire sales" of property that depress the market further. By limiting highly leveraged purchasing, LVR restrictions may help moderate house price volatility. The LVR restrictions can also moderate the scale of economic downturns by reducing household indebtedness and enhancing borrower balance sheets.
Comment Due Date: January 22, 2021
Keywords: Asia Pacific, New Zealand, Banking, COVID-19, LVR Restrictions, Regulatory Capital, Credit Risk, Macro-Prudential Policy, Residential Mortgage Lending, Basel, RBNZ
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
ECB published Guideline 2021/975, which amends Guideline ECB/2014/31, on the additional temporary measures relating to Eurosystem refinancing operations and eligibility of collateral.
EIOPA published a report, from the Consultative Expert Group on Digital Ethics, that sets out artificial intelligence governance principles for an ethical and trustworthy artificial intelligence in the insurance sector in EU.
HKMA published the seventh and final issue of the Regtech Watch series, which outlines the three-year roadmap of HKMA to integrate supervisory technology, or suptech, into its processes.
EC launched a targeted consultation to improve transparency and efficiency in the secondary markets for nonperforming loans (NPLs).
BIS, Danmarks Nationalbank, Central Bank of Iceland, Norges Bank, and Sveriges Riksbank launched an Innovation Hub in Stockholm, making this the fifth BIS Innovation Hub Center to be opened in the past two years.
FDITECH, the technology lab of FDIC, announced a tech sprint that is designed to explore new technologies and techniques that would help expand the capabilities of community banks to meet the needs of unbanked individuals and households.
EC released the EU Taxonomy Compass, which visually represents the contents of the EU Taxonomy starting with the EU Taxonomy Climate Delegated Act.
FDIC is seeking comments on a rule to amend the interagency guidelines for real estate lending policies—also known as the Real Estate Lending Standards.
EIOPA published its annual report, which sets out the work done in 2020 and indicates the planned work areas for the coming months.
The ESRB paper that presents an analytical framework that assesses and quantifies the potential impact of a bank failure on the real economy through the lending function.