RBNZ Proposes to Reinstate LVR Restrictions from March 2021
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.
Related Links
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
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Victor Calanog, Ph.D.
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Related Articles
APRA Issues Interim Update to Policy Priorities for 2021 and Beyond
In a letter addressed to the industry, the Australian Prudential Regulation Authority (APRA) set out an updated schedule of policy priorities for the banking, insurance, and superannuation industries.
EC Adopts Solvency II and Resolution Rules Package for Insurers
The European Commission (EC) adopted a comprehensive review package of Solvency II rules in the European Union.
OCC Issues Booklets on Regulatory Reporting and Earnings
The Office of the Comptroller of the Currency (OCC) issued Versions 1.0 of the "Earnings" and "Regulatory Reporting" booklets of the Comptroller's Handbook.
ECB Sets Out Results of Economy-Wide Climate Stress Tests
The European Central Bank (ECB) published results of its economy-wide climate stress test, which aimed to assess the resilience of non-financial corporates and euro area banks to climate risks.
EBA Examines Implications of Increasing Use of Digital Platforms in EU
The European Banking Authority (EBA) published a report on the use of digital platforms in the banking and payments sector in European Union.
HKMA Issues Updates on Policy Measures Intended to Ease COVID Impact
The Hong Kong Monetary Authority (HKMA) published updates on the policy measures that were announced in context of the ongoing pandemic.
ISDA Responds to BCBS Proposal on Treatment of Cryptoasset Exposures
The International Swaps and Derivatives Association (ISDA), along with several other associations, submitted a joint response to the Basel Committee on Banking Supervision (BCBS) consultation on preliminary proposals for the prudential treatment of cryptoasset exposures.
BIS Quarterly Review Discusses Developments in Fintech and ESG Space
BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.
BCBS to Consult on Supervisory Practices for Climate Risks by Year-End
The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards
OCC Identifies Operational Risk Deficiencies in MUFG Union Bank
The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.
