May 22, 2019

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.


Related Links

Keywords: Asia Pacific, New Zealand, Banking, Credit Risk, LVR Restrictions, Macro-Prudential Policy, RBNZ

Related Articles
News

EBA Consults on Guidelines for Loan Origination and Monitoring in EU

EBA launched a consultation on the guidelines on loan origination and monitoring in EU.

June 19, 2019 WebPage Regulatory News
News

OCC Bulletin on Risk Management Guidance for Home Mortgage Lending

OCC published Bulletin 2019-28 on risk management guidance for higher-loan-to-value (LTV) lending activities in communities targeted for revitalization.

June 19, 2019 WebPage Regulatory News
News

IFRS to Discuss Phase II of IBOR Reform at July Meeting of ASAF

IFRS published agenda papers for the Accounting Standards Advisory Forum (ASAF) meeting to be held on July 11–12, 2019.

June 19, 2019 WebPage Regulatory News
News

EC Amends Regulation Supplementing Solvency II Directive

EC published the Delegated Regulation (EU) 2019/981 that amends the Regulation (EU) 2015/35, which supplements Solvency II Directive (2009/138/EC) on the taking-up and pursuit of the business of insurance and reinsurance.

June 18, 2019 WebPage Regulatory News
News

IOSCO Report Examines Application of International Cyber Standards

IOSCO published a final report that examines the application of the three internationally recognized cyber standards and frameworks by IOSCO member jurisdictions.

June 18, 2019 WebPage Regulatory News
News

PRA Launches 2019 Stress Test Exercise for Life and General Insurers

PRA has launched the biennial insurance stress test and is asking the largest regulated life and general insurers to provide information about the impact of a range of stress tests on their business.

June 18, 2019 WebPage Regulatory News

SRB Outlines Upcoming Changes in Context of CRR2 and BRRD2

SRB published presentations made at the 8th Industry Dialogue in Brussels.

June 18, 2019 WebPage Regulatory News
News

EC Publishes Guidelines on Climate-Related Information Reporting

EC published the guidelines and associated frequently asked questions (FAQs) on corporate climate-related information reporting, as part of its sustainable finance action plan.

June 18, 2019 WebPage Regulatory News
News

PRA Finalizes Reporting Amendments to Pillar 2 Liquidity Framework

PRA published the final Policy Statement PS13/19 on regulatory reporting amendments and clarifications to the Pillar 2 liquidity framework for banks in UK.

June 17, 2019 WebPage Regulatory News
News

FSB Assesses Implementation of Compensation Standards and Principles

FSB published the sixth progress report on the implementation of its principles and standards for sound compensation practices in financial institutions.

June 17, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 3276