RBNZ published the financial stability report for November 2018. The report shows that both mortgage credit growth and house price inflation have eased to more sustainable rates, reducing the riskiness of new housing lending by banks. Consequently, RBNZ is easing loan-to-value ratio (LVR) restrictions on new mortgage loans of banks from January 01, 2019.
The LVR restrictions were introduced in 2013, in response to the rising housing lending risk. From January 01, 2019, up to 20% (increased from 15%) of new mortgage loans to owner occupiers can have deposits of less than 20% and up to 5% of new mortgage loans to property investors can have deposits of less than 30% (lowered from 35%). If banks’ lending standards are maintained RBNZ expects to further ease LVR restrictions over the next few years.
While domestic risks have eased, global financial vulnerability has risen. Significant build-ups in debt and asset prices, and ongoing geopolitical tensions, overhang financial markets. This vulnerability is highlighted by the current elevated price volatility in equity and debt markets. New Zealand’s exposure to these global risks has reduced somewhat, as New Zealand banks have become less reliant on short-term, and foreign, funding. The domestic banking system remains sound. The banking system remains profitable, reflecting banks’ low operating costs and strong asset performance. RBNZ is using this period of relative calm to reassess whether the banking system has sufficient capital to weather future extreme shocks. The preliminary view is that higher capital requirements are necessary, so that the banking system can be sufficiently resilient while remaining efficient. RBNZ will release a final consultation paper on bank capital requirements in December.
While positive overall, banks’ low costs have been partly achieved through underinvestment in core IT infrastructure and risk management systems in New Zealand. This was highlighted in RBNZ's review of bank’s conduct and culture with the Financial Markets Authority. RBNZ will jointly review bank responses to its review in March 2019 and follow up, as required. In addition, CBL Insurance Ltd was placed into full liquidation by the High Court on November 12. Aside from CBL, the overall insurance sector is meeting its minimum capital requirements. However, capital strength has declined and a number of insurers are operating with small buffers. The insurance industry must ensure it has sufficient capital to maintain solvency in all business conditions. The ongoing review of conduct and culture in the insurance sector with the Financial Markets Authority will illuminate the industry’s risk management capability. The review will be released in January 2019.
Keywords: Asia Pacific, New Zealand, Banking, Financial Stability, Mortgage Lending, LVR Restrictions, RBNZ
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