The Reserve Bank is giving trading banks guidance on what types of things it's likely to view as being used to circumvent its incoming loan to value ratio (LVR) restrictions on residential mortgages.
In an article in the Reserve Bank's latest Bulletin, Lamorna Rogers an advisor on macro-financial stability at the Reserve Bank, notes this.
"The Reserve Bank is providing banks with guidance on the types of arrangements that might be deemed 'avoidance' measures if used to circumvent the new regulations, and expects bank senior management and bank boards to respect the spirit and intent of LVR restrictions," Rogers writes.
From October 1 all banks must restrict new residential mortgage lending at LVRs of over 80% to no more than 10% of the dollar value of their new housing lending flows.
Allowing for exemptions the Reserve Bank estimates this 10% "speed limit" will effectively limit the banks’ high-LVR lending flows to about 15% of their new residential lending, versus the estimated 30% they've been doing.
Banks do, however, have six months to phase in the new restrictions meaning the first test of the LVR restrictions will effectively come at the end of March next year.
Rogers also notes that the Reserve Bank is aware that imposing LVR restrictions might create incentives for banks and others to introduce products designed to circumvent the regulation.
It has made complying with the restrictions a condition of bank registration.
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