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
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
IAIS Consults on Application Paper on Resolution Powers and PlanningRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.