By Bernard Hickey
Departing Reserve Bank Governor Alan Bollard has argued against moves towards Loan to Value Ratio (LVR) limits on mortgages in his final exit interview (see above) with Interest.co.nz.
The Reserve Bank is looking at using various 'macro-prudential tools' to influence bank lending behaviours to try to avoid asset bubbles like those seen in the mid 2000s, including a surge in house prices between 2003 and 2008 in New Zealand that underpinned a burst of consumer spending and household borrowing.
"That's one of the tools one might look at under macro-financial policies and where would you use it? Yes in a time perhaps like the mid 2000s," Bollard said when asked about the use of LVR limits by central banks and regulators in places such as Canada, Singapore and Hong Kong.
"A loan to value ratio might be the least desirable of the ones we might look at. The ones we might look at might be counter cyclical credit requirements," Bollard said around the 5 min 40 mark in the interview.
I then asked why he didn't prefer LVR limits.
"Because I can remember the 1970s and you can't Bernard, that's why," he said. "Those sorts of direct interventions (were used) and they ended up with lots of distortions, and they ended up with people finding other ways to get money, and that's where some of our current crop of finance companies came from, ways to get around bank regulation in the 1970s," he said. "They're distortions."
I then asked if it was therefore always the Reserve Bank's job to limit the natural tendencies of banks to try to grow lending faster than sometimes was good for an economy.
"Yes. We would more likely do it by looking at increasing the amount of capital required, increasing risk weightings on assets, or increasing liquidity requirements. ie fiddling with bank balance sheets rather than fiddling with household decisions because we think we'd be more effective doing that. Not to say you wouldn't use loan to value ratios, you potentially could," he said.
"Indeed, Around 2007, we were thinking of doing those, and we went in and talked to the banks and told them to slow down on their lending, particularly to the farming sector. By then they had slowed on housing, but they were pushing away on the farm lending bubble off the back of very strong dairy prices, but they were happening very late in the cycle and we'd already had Northern Rock and a few of those nasty Northern Hemisphere signalling events by then. We did slow them down that way. We might have done that a little earlier, if we were going to do that again."
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