Reserve Bank (RBNZ) Deputy Governor and Financial Stability Manager Geoff Bascand has clarified the regulator wants to get itself in a position where it can apply debt serviceably restrictions to banks’ mortgage lending, but this doesn’t necessarily mean it will apply these restrictions straight away.
Bascand told interest.co.nz the RBNZ will at the end of this month start consulting on whether these tools should be part of the RBNZ’s macroprudential toolkit.
“But we still have to go through a process of deciding whether they would be worth introducing and whether the benefits would outweigh the costs,” Bascand said.
The RBNZ has repeatedly said implementing a debt-to-income (DTI) limit could take “at least six months” following the design and calibration of the tool. Meanwhile setting floors on the test interest rates banks use in their debt serviceability assessments could be implemented sooner.
“We’re keen to have these part of our toolkit and we’d like to be able to apply them,” Bascand said.
“But we’ve still always got to make that decision; are they needed? Are they not needed?”
The RBNZ in December 2020 asked Finance Minister Grant Robertson for permission to use debt serviceability tools. In August 2021 he said yes, on the condition the RBNZ avoids negatively impacting first-home buyers “as much as possible.”
LVRs could be loosened if DTIs are brought in
Asked whether the RBNZ would loosen loan-to-value ratio (LVR) restrictions if it introduced debt serviceability restrictions, Bascand recognised LVRs are set at “quite a tight level”.
“So, one could think potentially about some slight change in mix,” he said.
“The settings will depend very much on how high the risks are at the time.”
LVRs help prevent borrowers from falling into negative equity, while DTIs help build borrowers’ buffers against serviceability shocks, like interest rate rises.
Bascand worried about the cumulative effect of high-risk lending to FHBs
Bascand defended the RBNZ’s decision to effectively target first-home buyers with its recent tightening of LVR restrictions.
As of November 1, only 10% of banks’ new lending to owner-occupiers can go to borrowers with deposits of less than 20%. Previously this allowance, which banks largely use to accommodate for first-home buyers, sat at 20%.
Jim Reardon, CDS Consulting managing director and former Westpac treasurer, is among those who have criticised the RBNZ for its approach.
He made the point banks’ high-LVR lending allowances will be below 10% in practice, as banks tend to give themselves buffers to avoid breaching their limits.
“An operating limit of 5% would effectively leave most first-home buyers out of the housing market," Reardon warned.
“Restrictions on first-home buyers would have long term social impacts as a generation of potential homeowners are destined to become lifetime renters.”
While a 20% fall in house prices would see 22% of mortgage lending to first-home buyers in the year to July in negative equity, it would only see 5% ($5 billion) of all mortgage lending done in that year in negative equity.
That $5 billion is equivalent to only 1.6% of banks’ mortgage books.
Bascand said the RBNZ was worried about the cumulative effect of banks doing a lot of high-risk lending.
“I’m not trying to paint a panic picture that our system is immediately under enormous stress, but you could see the risks rising, especially when house prices have such a high risk of a fall,” he said.
Asked why the RBNZ was targeting a specific type of borrower, while making the case the financial system as a whole is stable, Bascand said, “The financial system’s resilience is partly built on the measures we have taken…
“Banks don’t take all that sufficient care by themselves unless we restrict them.”
Capital requirements not impeding business lending
Interest.co.nz also asked Bascand whether the amount of capital the RBNZ requires banks to hold for the different types of loans they issue (housing, business, agricultural, etc) is supporting financial stability in the long run.
Banks’ loan books are increasingly heavily weighted towards property. For example, housing lending reached 70% of ANZ NZ's total lending this year - up from 67% in 2020, and 63% in 2019.
Bascand said the RBNZ’s framework takes a “sensible” risk-based approach.
“Business lending is more risky. That’s why we ask them to hold more capital for that,” Bascand said.
“There are some risks in the housing sector, and the total amount of capital we’ve asked them to hold is to make sure they’re covered for that.”
Bascand didn’t believe requiring banks to hold a bit more capital for housing loans and a bit less capital for business loans would prompt them to reweight their loan books more in favour of business lending.
He noted banks aren’t capital constrained. Rather, businesses are hesitant to borrow in the current uncertain environment.
He said the RBNZ has “quite conservative” capital requirements for mortgage lending by international standards.
Bascand maintained the competitiveness of the banking sector has a greater bearing on businesses' access to funding than bank capital risk weightings.
First part of video interview focuses on mortgage lending; second part covers business lending.
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