RNBZ announced that it has refreshed the strategy for using macro-prudential policy, six years after its implementation. On this topic, RBNZ also published a speech by Geoff Bascand, the Deputy Governor and General Manager of Financial Stability at RBNZ. In addition, the government is reviewing the role and powers of RBNZ as they relate to financial stability, including whether the macro-prudential framework remains fit for purpose.
While speaking at a conference hosted by Otago University, Mr. Bascand examined how macro-prudential policy mitigates risks to the financial system, whether the macro-prudential policy of RBNZ has enhanced financial stability, how macro-prudential policy should be governed, and the approach of RBNZ to using the macro-prudential tools. He said, "financial stability is important for the well-being of New Zealanders and macro-prudential policy is a key line of defende for safeguarding financial stability. Our refreshed strategy on macro-prudential policy provides us with greater clarity on how we will use macro-prudential tools in the future and provides New Zealanders with the confidence they need that the financial system is in good hands.” When risks are heightened, RBNZ uses macro-prudential tools to complement other financial regulation such as capital requirements. This reduces the likelihood and severity of threats to the financial system and mitigates the adverse impact on the economy.
In the macro-prudential toolkit the most well-known tool is the loan-to-value ratio policy (LVR), which improves the resilience of mortgage loans. There are also capital and liquidity tools that build additional buffers for banks, putting them in a better position to keep lending to the economy if things take a turn for the worse. Mr. Bascand also said that the refresh to the strategy was informed by the experience using the LVR tool. “The Reserve Bank’s LVR restrictions have been successful in reducing some of the risk associated with high household indebtedness. Our analysis showed that as a result of introducing the LVR policy, resilience of the banking system has increased, while side effects have been limited, and that’s a good outcome.” Commenting on the outlook for LVRs, Mr. Bascand noted that further easing in LVRs is possible if risks decline, which requires continuing subdued growth in credit and house prices and banks maintaining prudent lending standards. To ensure that tools can be utilized when they need to be, RBNZ needs to maintain operational independence in macro-prudential policy, supported by transparent communication and clarity about its objectives.
Keywords: Asia Pacific, New Zealand, Banking, Macro-Prudential Policy, Macro-Prudential Tools, Financial Stability, LVR, RBNZ
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