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
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