RBNZ Reviews Restrictions on Policy for Loan to Value Ratio
RBNZ published a report on the review of the loan to ratio (LVR) restrictions as part of a wider review of the macro-prudential policy. The review traces changes in the LVR policy over the past five years, analyzes the effect they have had on banks and households, and asks what RBNZ can learn from this experience. RBNZ also published a report that explains the role of macro-prudential policy, how the policy is conducted, and its effectiveness at enhancing financial stability.
RBNZ had introduced LVR restrictions in October 2013 in response to financial stability risks associated with a potential house price correction and high-LVR mortgage lending and it has adjusted the policy settings in response to changing risks. The review suggests that the LVR policy has been effective in improving financial stability. By mitigating the scale of house price falls during a potential downturn and limiting the indebtedness of households, the policy has made the financial system more resilient to a housing-led downturn. Declining risk-weights for housing loans have offset some of the resilience benefit of LVRs, although RBNZ has adjusted baseline housing capital calibrations to stabilize risk-weights and support bank resilience since 2013. The LVR policy has also mitigated the likely decline in household spending and economic activity during a stress scenario.
The LVR policy also comes with drawbacks. The policy has restricted some creditworthy borrowers with high debt serviceability, but low equity, from purchasing houses and this reduces reduces "allocative efficiency." The LVR restrictions have also created tension with other public policy objectives, such as housing affordability for first home buyers. However, the restrictions tend to have a greater impact in directly reducing housing and household sector risks and in mitigating the scale of an economic downturn, when compared to the capital-based macro-prudential tools that are focused on building additional bank capital buffers for absorbing shocks. On balance, this review considers that LVR policy has helped to fulfill RBNZ's statutory objective of promoting the soundness and efficiency of the financial system.
Disintermediation to the policy has not been significant, suggesting that the policy will remain effective for longer than RBNZ had expected in 2013. However, LVR tool is only part of a broader prudential framework that tackles risks. Phase 2 of review of the Reserve Bank Act will include consultation on options for the future macro-prudential framework.
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Keywords: Asia Pacific, New Zealand, Banking, Credit Risk, LVR Restrictions, Macro-Prudential Policy, RBNZ
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