Featured Product

    RBNZ Reviews Restrictions on Policy for Loan to Value Ratio

    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

    PRA Consults on Implementation of Certain Provisions of CRD5

    PRA, via the consultation paper CP12/20, proposed changes to its rules, supervisory statements, and statements of policy to implement certain elements of the Capital Requirements Directive (CRD5).

    July 31, 2020 WebPage Regulatory News
    News

    EIOPA Report Identifies Key Financial Stability Risks for Insurers

    EIOPA published the financial stability report that provides detailed quantitative and qualitative assessment of the key risks identified for the insurance and occupational pensions sectors in the European Economic Area.

    July 30, 2020 WebPage Regulatory News
    News

    EBA Publishes Risk Dashboard for First Quarter of 2020

    EBA published its risk dashboard for the first quarter of 2020 together with the results of the risk assessment questionnaire.

    July 30, 2020 WebPage Regulatory News
    News

    EBA Issues Updates on Stress Test Exercise for Banks in EU

    EBA announced that the next stress testing exercise is expected to be launched at the end of January 2021 and its results are to be published at the end of July 2021.

    July 30, 2020 WebPage Regulatory News
    News

    PRA Proposes Guidance Related to Matching Adjustment under Solvency II

    PRA published the consultation paper CP11/20 that sets out its expectations and guidance related to auditors’ work on the matching adjustment under Solvency II.

    July 30, 2020 WebPage Regulatory News
    News

    MAS Issues Guidance on Dividend Distributions by Banks

    MAS published a statement guidance on dividend distribution by banks.

    July 30, 2020 WebPage Regulatory News
    News

    APRA Updates Guidance on Capital Management for Banks

    APRA updated its capital management guidance for banks, particularly easing restrictions around paying dividends as institutions continue to manage the disruption caused by COVID-19 pandemic.

    July 29, 2020 WebPage Regulatory News
    News

    FSB Report Reviews Macro-Prudential Framework and Tools in Germany

    FSB published a report that reviews the progress on data collection for macro-prudential analysis and the availability and use of macro-prudential tools in Germany.

    July 29, 2020 WebPage Regulatory News
    News

    EBA Urges Firms to Finalize Preparations for End of Brexit Transition

    EBA issued a statement reminding financial institutions that the transition period between EU and UK will expire on December 31, 2020; this will end the possibility for the UK-based financial institutions to offer financial services to EU customers on a cross-border basis via passporting.

    July 29, 2020 WebPage Regulatory News
    News

    SRB on Operational Continuity in Resolution and FMI Contingency Plans

    SRB published guidance on operational continuity in resolution and financial market infrastructure (FMI) contingency plans.

    July 29, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5606