RBNZ Deputy Governor: Saying goodbye to mortgage lending restrictions won't cause rapid credit growth - the bigger risk right now is banks being too conservative

RBNZ Deputy Governor: Saying goodbye to mortgage lending restrictions won't cause rapid credit growth - the bigger risk right now is banks being too conservative

Reserve Bank (RBNZ) Deputy Governor Geoff Bascand is more worried about banks being overly cautious than he is concerned about them lending up a storm, should mortgage lending restrictions be scrapped.

The RBNZ is spending the next week consulting with banks on its proposal to remove its loan-to-value ratio (LVR) restrictions, first imposed on banks in 2013.

Given banks hadn’t done as much high-risk lending as they were allowed to under the rules pre-COVID-19, Bascand believes over-prudence is the “more likely risk” in the current environment - even without restrictions.

Under the rules, no more than 20% of a bank’s new mortgage lending can go to owner occupiers with deposits of less than 20%. Meanwhile no more than 5% of a bank’s new mortgage lending can go to investors with deposits of less than 30%.

In February 2020, 10% of all new mortgage lending (owner occupier and investor) went to borrowers with deposits of less than 20%. Back in 2013, this portion sat at 25%.

LVR restrictions were designed to be temporarily employed to “lean against excessive credit cycles”, Bascand told interest.co.nz.

“We don’t have an excessive credit cycle right now. We’ve really got the opposite. We’ve got the risk that the economy is seriously in a severe downturn. Credit growth will be slowing.”

Helping banks 'soften the blow to the economy'

Bascand feared keeping the LVRs in place could prevent banks from deferring mortgage repayments, as this could tip them over their high-risk lending limits.

“I don’t think there are many [mortgage holders] in that circumstance, but for a small bank with not too many high LVR loans, they might not need many to breach the requirements,” Bascand said.

He recognised there had been a lot of interest in mortgage repayment deferrals, but couldn’t say how many of these were high LVRs.

The New Zealand Bankers’ Association’s members has provided 42,949 customers with mortgage repayment deferrals. The amount outstanding on these loans is $15.9 billion. Put in context, New Zealand banks wrote mortgages worth a total of $5.6 billion in February.

“We’re just really helping banks to soften the blow to the economy in the short-term by doing this [proposing to ditch LVR restrictions]. We’re not really at risk of rampant credit growth,” Bascand said.

He wasn't concerned scrapping the rules would particularly favour investors at the expense of first-home buyers.

“We think banks will be cautious. We think households in general will be a bit cautious because house prices are more likely to decline than to rise solidly in this environment. That probably deters investors. It’s not such a good time to invest if you think the asset prices are going to decline.”

Bascand believed there wasn't much point loosening LVRs, as the RBNZ has done in the past, saying these they would have to be eased quite a bit to have the intended effect. Accordingly he maintained the simplest solution is to just abandon them and review the situation in a year's time. 

'I obviously worry about those tail risks in terms of how bad it could be in two years’ time'

Asked how concerned he was about New Zealand’s high household debt in general, Bascand said: “A number of households have a lot of debt and they are very exposed, particularly if they lose their jobs. You can get house price falls, but if you don’t have to sell your house, you could probably ride that out for a while. But if you lose your job, then paying your mortgage becomes a problem.

“We brought this [LVR] policy in to avoid those risks getting worse and… we think those risks have subsided. We’ve improved the stability of the system of the time. It’s safer than it was.

“But I’m not so optimistic or delusional as to think there aren’t risks there. There are risks there if this becomes a long-term protracted downturn. That’s a scenario that’s not implausible.

“All the time we’re looking ahead and thinking, where will we be in 12 months, 18 months. Right now we’re fine in terms of the banking system, but I obviously worry about those tail risks in terms of how bad it could be in two years’ time.”

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55 Comments

17
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RBNZ Deputy Governor says saying goodbye to mortgage lending restrictions won't cause rapid credit growth - the bigger risk right now is banks being too conservative

If that were the case there would be no need to loosen the leverage levels. There is nothing conservative about 80% LVRs when banks are employing 35% or less RWA capital constraints, which the RBNZ claims amount to $8 of their shareholders' money for every $100 of lending, with unsecured depositors and creditors providing the rest.

24
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"We think banks will be cautious. We think households, in general, will be a bit cautious"
I'm sorry. I needed a good after-dinner laugh...
Give it a few months Geoff, and have a look at what you have done. Or more importantly for our economy, what you shouldn't have done.
(I don't thnk you've actually worked in a real bank, have you Geoff? I have. And I can tell you, the first thing that happens when a change like this comes out of the blue is - you get the Directorial Committee together and say "Right-ho. How do we make money out of this!" Caution? That's the last thing that's discussed)

I laughed at the same comment.
What a fool.

Also:
"Whenever you do something you can't guarantee that it won't have an unintended effect on the odd case".

I mean, how ignorant can you be?
The RBNZ have had 10 years of "doing things" that have severe unintended effects... and it's all distorted property to the upside.

I have *ZERO* confidence in these guys.
They clearly spend way too much time in their ivory tower and have no idea of the havoc they wreck.

Manage incramentally, edging closer to the brink, wise to bulld in a buffer during good times.

12
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So to help some small banks defer mortgage repayments without tipping them over LVR limits, you remove the limits completely. Wow. Cheap, easy money is the drug that will sink all of us.

Honestly - who would want to work in the RBNZ this year. Not me. Going to be pretty tough for them to make the right calls. Perhaps damned if you do, damned if you don't.

What’s the pay check again?

What are the consequences...

30
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"the bigger risk right now is banks being too conservative"

No the bigger risk is some numpty at RBNZ thinking they have a role in promoting risky lending on property immediately before what most think is going to be the deepest recession in recent memory.

Why dont we also remove the speed limit on motorways if snow is expected ?

"Why don't we also remove the speed limit on motorways if snow is expected" - can this be up for quote of the year

Excellent proposition to remove the LVR's, it makes perfect sense. Go ahead with it asap

why does it make perfect sense ?

Because we can't ever allow house prices to fall - that is why.

lol, good answer.

Did you hear that Level 3 is level 4 with takeaways.... and you thought that just meant KFC and maccas. Well surprise.

Protect the sacred cow from the market!

I suppose it would allow a bank to open up more access to the equity a homeowner has in their house. Giving a mortgage holiday is not just deferring the cost but is adding to it with interest, and maybe living cost withdrawals, etc.

As an example, if your LVR was set at 80% and that was your mortgage equivalent, then you wouldn't be able to access your equity in the remaining 20%.

This way the banks can lend against that equity, taking into account how much they expect the prices to fall, so if you had to use up 10% of your equity and the value also fell 10%, then you have used up all your equity. Any further requirements beyond this might mean you need to sell, with the banks (of course) getting all their capital back.

If they didn't do this and it caused you to go into default, and therefore mortgagee sale, then there is a possibility both you and the bank could lose out.

This shows you how serious (and worried the RBNZ) is to allow this to happen as it is a measure to help the banks. The fact that the homeowner gets some benefit out of it, is almost a happy coincidence.

LVRs originally introduced circa 2013 and have done their job of taking the froth off the market.

15
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repeating the RBNZ line doesn't make it true.

LTVs or Income multiple borrowing limits are used along with risk capital requirements the world over protect the tax payer from having to bail out banks.

Why do countries bail out banks you ask ? Because if they didnt depositors would lose all their money and that would be a calamity. Imagine your grandmother without a dollar to her name.

If RBNZ said LTVs were introduced to take the froth off the market they were clearly unaware of the true purpose of LTV limits. But more importantly it was never local borrowing that drove the market to the stratosphere, it was Chinese money and rock bottom interest rates. RBNZ didnt solve the first issue, that was predominately the Chinese government imposing capital controls and regarding low rates, RBNZ created the problem they did not solve it.

Given the large numbers seeking mortgage deferral or those seeking a top up of an existing mortgage, it would appear it is the retail banks that have gone running to the RBNZ and not the RBNZ seeking a 1 week consultation for the removal of the LVRs to assist lemons onto the ladder. . . As Mr Bascand states house prices are more likely to decline . With 7.5 percent of existing mortgages above 80 percent and in Mr Bascands words the likelihood of asset deflation , that number can only increase in those circumstances.
Given Mr Orr appears willing to directly monetise government debt, why does the RBNZ not cut the OCR substantially below zero , and put everyone out of their misery.
Surely if the only reason is that banks IT systems are still not able to accommodate very negative rates , that is their loss and ineptitude.

Lower interest rates do not improve the creditworthyness of the majority- meaning the two thirds of households that do not have mortgages, probably because they do not qualify in terms of income or savings and hardly will in the near future. Why should their deposits be exposed to OBR in the event of a solvency event caused by the few?

Good question Audax. I'd be very pissed if my bank deposits got a haircut because some parasitic landlord couldn't manage his business and risk properly.

10
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I am not an economist by any stretch. But if you watch the interview, it is clear as daylight that he is unsure about the risk assessment done internally and in turn unsure about the proposal being put forward.
Way too many variables in this environment.

I suspect the RBNZ is a deer caught in the headlights of an on coming car....

Was reading that currently banks only have 11% of their new lending at high LVR vs a limit of 20% so they are not even making use of the current 20% limit. Would expect banks to tighten up lending as well with house prices likely to decline.

Whatever Mr RBNZ deputy Governor.

Should say Sorry for floating such an idea instwad of trying to defend.

Real Shame. Time To Go. Reset Button is On

Phew , what a relief to get some idea of what they are thinking ...........why did they not come clean and tell us their thinking up-front ?

Instead we are treated like like mushrooms , kept in the dark and get nothing but social media bullshit .

13
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"Banks being overly cautious". What a ridiculous statement. They have been lending into the Ponzi scheme for years. Ponzi is done and RBNZ knows it.

Wonder what the RBNZ is seeing that outsiders aren't seeing.

The spectre of losses on their boomer property portfolios.

10
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Posting this here too:
I encourage everyone to make a submission to the RB on this at: rbnz-info@rbnz.govt.nz, according to this page: https://www.rbnz.govt.nz/news/2020/04/reserve-bank-proposes-to-remove-lv...

You may also want to reference this 2017 stress test: https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Bulletin...

In this stress test they test whether the banks can stand unemployment of 13.2%, a drop in GDP of 5.5%, a 40% decline in Residential housing values along with a 35% decline in the Commercial Property values. The result of the stress test is stated as: "Overall, these outcomes suggest that, as a group, the large New Zealand banks could absorb material losses in a downturn event while remaining solvent."

These numbers used in the test are much worse than those being predicted. So we were either lied to about the solvency of our big banks, or we are being lied to about how bad the numbers are going to get. Either way, we should all be very angry and express our displeasure with as many articulate arguments as we can muster.

In addition, you may want to read this: https://www.rbnz.govt.nz/-/media/reservebank/files/publications/analytic...

In this you may note: "We find that the LVR restrictions have significantly improved the resilience of the banking system. The LVR policy has reduced the scale of mortgage defaults and credit losses that would occur in a housing downturn, due to a reduction in risky loans on bank balance sheets and the mitigation of a potential house price decline."

Removing the LVR restrictions will make the financial system less resilient, not more.

It is clear that even RBNZ has no clue and is experimenting assuming that bank as well as home buyers will not expose much and will do due delligence.....are they stupid.....

Can they give an undertaking that their decession will not misfire and if it does are ready to be prosecuted - personal liability as everyone should be made accountable for their decession and action.

As it is many will suffer, which is inevitable but RBNZ is ensuring / leading to a path of Disaster.

May be not a bad idea to hibernate RBNZ as have run out of idea and experimenting at our cost.

This is crazy. Listen to him at roughly 4:40 in. He basically says "A small bank might get into temporary breach of our rules if they have a few people whose equity becomes an issue, they may have 82% of their loans as high LVRs".... so the conclusion they have is... remove the rules!

Such logic! Imagine if police used the same logic: Officer sees someone going 100kmph, who then accelerate to 120kmph. Officer rings up Minister of police and says "Excuse me Minister, I just saw someone break the law, so I think we should just remove the law. Cool?".

I haven't bothered watching the interview, but wonder if RB is looking to alleviate a situation where Banks are not deferring mortgages as effectively this will mean 'new lending' and the LVR will then be in breach....can anyone shed light on my presumption?

Thanks

I wonder how long until these clowns announce negative interest rates and choose to "look through" all the inflation they unleash.

They'll remove anything from the CPI measure that has an inkling of inflation.

I love it how the deputy governor considers over-prudence to be a 'risk'. Lol.

Many commenters are terrified that the economy will be saved and their dreams of a socialist utopia will be shattered thus they protest any attempts to remove business constraints such as LVRs. They also want an endless lockdown to achieve the same ends.

10
up

On the contrary.
New Zealand has a shot at rejuvenating its business, political and social economies.
Trying to retain the worst elements of the past isn't going to help.

What happens now, after all the hoo-ha and criticism of the LVR abolition plan, is that the RBNZ "digs in". They don't want to 'consult' they want to be 'consoled' that what they are about to do will work. And if it doesn't, they want to be able to say 'Others agreed with us at the time"
They now find themselves isolated, and rather than backtrack, they will press on with what they have decided to do and cross their fingers.
Next, comes the failure of the policy, and refusal to 'change course'. Pride comes before a fall, and all that.
Ultimately will come the 'resignations';'retirements' ( on a good pension wicket of course!) and staff 'changes' to allow for another policy to be enacted - in all likelihood, similar to what we have today.
But that is going to be a long way down a financially ruinous path.

We already live in a socialist utopia..keep up!

LVRs affect residential housing. So you are way off the mark that they are business constraints...

Agents, brokers, bankers, insurance companies, lawyers, signage companies, magazines and newspapers, The Block, valuers, building assessors, home renovators, builders supplies, all operate in the realm of property transactions. What is that if it is not business??

Not so, for 24 years we borrow to cover the capital requirements of many businesses using residential mortgages as it is the cheapest Finance.
Also out of interest we have found borrowing criteria the toughest it has ever been, so we welcome loosening.

Or are you just worried that your entire "retirement scheme" is just a ponzi scheme and this is evidence of it. Any bump in the road and the wheels come off.

What on earth are you on about?

A socialist utopia for the all-important property sector is precisely what folk are pointing out is a bad idea.

I hate the idea of socialism.

But I also really hate this crony command economy, with the RBNZ at the centre, that underwrites risk in the housing market.

That's not free market capitalism.
It's a joke.

You say "remove business constraints such as LVRs"
Why don't we remove the RBNZ that is holding rates unnaturally low and let Banks price credit risk accordingly.

RBNZ : REMOVING LVRs WILL GIVE BANKS MORE LEEWAY TO DIFFER MORTAGE REPAYMENT.

If it is intended to give bank more flexibility for existing customer to avoid facing problems due to Corona Virus than it can be targeted to them specifically instead of all - new application.

Flawed argument to support flawed decession. Keep aside you EGO and admit Mr Governor and Government.

GO BACK RBNZ.

Reset and NZ should not be Rocking Economy only because of Housing Economy in future.

Wow, the logic beggars belief. Surely targeted exemptions to the limits would have dealt with the issue of mortgage deferrals?

Wow, the logic beggars belief. Surely targeted exemptions to the limits would have dealt with the issue of mortgage deferrals?

How can the RBNZ measure the effectiveness or impact of changes you make if you keep changing the rules every couple of weeks?

It takes time for the impact of a change to be fully realised, when you compound them - how do you effectively measure any specific change and draw any cause-effect relationships from it? As they say you can't manage what you can't measure..

Reserve ratios have been dropped, interest rates are already low, Is the LVR change to help borrowers or banks?

Extend and pretend. Kick the can. Never take the hit that is necessary to rebalance the economy and ensure a more productive future.

Already sent out memos to those IWI leaders & business entities, even the remaining of 30millions of Covid19 grants can be better utilised in AKL & regions property market. The next 12months of promising RBNZ reprieve on Banks loan restriction, should be a clear signal to snub up those properties that can be used for Native community housings, business backup/startup to borrow against. After 12 months there's some strong market indication that post Covid19, opening up borders. The US & CCP RE buyers already lineup. Kiwis this is a once in life time opportunity for you to contribute, stand up by your own F.I.RE economy productivity.
https://www.scoop.co.nz/stories/HL1507/S00101/the-fire-economy-new-zeala...

If the concern is existing lending breaching then why not just grant an exemption there and retain LVRs on new lending???

If banks are conservative because they really need to be conservative, this is just another attempt to keep fueling the housing market with first home buyers.

I have to wonder at some of these comments. So many who know so much more about banking than bankers...
I wonder why they don't get on the boards?
Or get into government and get those banks into line.

Not saying I'm a fan of banks myself but

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