By Gareth Vaughan
The Reserve Bank needs to be careful that its move to force the big four banks to hold more capital against home loans with high loan-to-value ratios (LVRs) solves the problem it wants to solve, BNZ's CEO Andrew Thorburn says.
Speaking to interest.co.nz after BNZ issued its interim financial results, Thorburn said the Reserve Bank ought to be mindful of unintended consequences.
"We have said to the Reserve Bank 'be careful of the unintended consequences' because you have to be clear what the problem is," Thorburn said. "And it seems as though everybody believes that one of the core problems is rising house prices in Auckland, and this is making housing affordability more difficult and it's possibly creating a bubble."
"To me the long-term issue around that is supply and infrastructure and transport," Thorburn added. "To me that's the main driver of the increase in house prices. Demand, supply inward migration, international migration, and lack of a co-ordinated long-term plan." (Thorburn's comments were made on Thursday, before the Friday afternoon Auckland Housing Accord announcement by the Government and Auckland Council).
"So this housing LVR piece, they have to be careful that they're solving the problem that they want to solve."
Through its latest bi-annual Financial Stability Report on Wednesday the Reserve Bank said the big four banks - ANZ NZ, ASB, BNZ and Westpac NZ - will have to hold an average of 12% more capital against housing loans where the borrower has less than 20% equity from September 30 to cover potential losses. That adds up to an average of NZ$125 million per bank, although the BNZ figure will be lower than the average.
Thorburn said, however, that if the Reserve Bank was focused on the quality of the banks they were already strong.
"And in the last 20 years I don't think there have been significant losses at any time regardless of any shock, due to housing. It has been commercial property and residential development and business," said Thorburn.
BNZ's interim results showed the ratio of loans at least 90 days past due plus gross impaired assets to gross loans at 1.13%, which was down 8 basis points over the half-year.
Thorburn noted that 15% of BNZ's residential mortgage book is at LVRs above 80%, which is lower than the other major banks.
"We apply a low equity premium (on LVRs) above 85% and we have a higher debt servicing requirement for higher than 80% lending. So we are already taking prudent steps to make sure that (for) the risk we're taking we are protecting the bank and the (financial) system, and we're ensuring that people can repay their loans," said Thorburn.
BNZ would need to "recover somehow" the higher costs it faces through the increased capital it'll have to hold against high LVR mortgages. The Reserve Bank estimates the increased capital required by the banks will result in a fall in their regulatory Tier 1 capital ratio, which represents shareholders' funds in the banks expressed as a percentage of total risk weighted exposures, of about 40 basis points on average. Over the medium-term the Reserve Bank expects the banks to raise fresh capital to maintain their capital ratios.
In 2011 the Reserve Bank increased the amount of capital the big four banks have to hold against farm loans in the wake of falling dairy payouts and concern over loose rural lending. Thorburn said that increase had been "priced in" by the banks, which was presumably what the Reserve Bank wanted to see happen with high LVR home loans too.
"That's part of their point that they hope it'll result in a higher price that will slow down demand," said Thorburn.
He said gross lending growth to the agriculture sector, where total debt recently topped NZ$50 billion for the first time, had slowed since the Reserve Bank move.
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