Reserve Bank Governor Graeme Wheeler will make a speech today entitled Explaining the role of macro-prudential policy.
The speech, scheduled for 2pm, comes after the Reserve Bank last week released its response to submissions on one of its four so-called macro-prudential tools, temporary restrictions on banks' high loan-to-value ratio (LVR) residential mortgages.
Asked where the speech will be made and whether it was open for media to attend, a Reserve Bank spokesman said: "The speech is in NZ and not open to the media."
The Reserve Bank could give a notice period as short as two weeks if it intended to implement LVR restrictions on a temporary basis.
The Reserve Bank says any implementation of LVR restrictions would typically take the form of "speed limits" limiting the share of new high LVR lending that banks may do, rather than banning such lending altogether. The Reserve Bank "generally defines" high-LVR lending as loans with an LVR of 80% or more, and LVR restrictions would be unlikely to be imposed below this threshold.
The Reserve Bank has said each restriction would be specified in the form of a "speed limit" meaning no more than X percent of applicable new mortgage lending over each specified period can have an LVR greater than or equal to Y percent.
Grant Spencer, the Reserve Bank's Deputy Governor, last week said LVR restrictions on residential mortgage lending could help dampen excessive house price growth in periods when credit growth is boosting housing demand beyond housing supply.
“In so doing, they can reduce the risk of a rapid correction in house prices and the economic and financial instability that would ensue," said Spencer.
“In situations where house prices are overvalued, the further that house prices rise, the more likely it is that a disruptive downward correction will occur. Such a correction would be very damaging if combined with a significant deterioration in economic or financial conditions.”
After a memorandum of understanding was signed between the Reserve Bank and Finance Minister Bill English in May paving the way for the macro-prudential tools, Wheeler said the tools could be used to build additional resilience in the financial system during periods of rapid credit growth and rising leverage or abundant liquidity.
They would also dampen excessive growth in credit and asset prices, he said.
“These new tools could be used from time to time to help avoid extremes in credit and asset price cycles. They can promote financial stability by helping to build capital buffers and reduce incentives for speculative behaviour, which can contribute to boom-bust cycles in credit and asset prices," said Wheeler.
The four macro-prudential tools, which could only be applied to registered banks on a temporary basis and wouldn't affect existing loan agreements, are:
- the countercyclical capital buffer, effectively banks holding more capital during credit booms;
- adjustments to the minimum core funding ratio, altering the amount of retail funds and longer-term wholesale funding banks have to hold;
- sectoral capital requirements, or increasing bank capital in response to sector-specific risks;
- restrictions on high LVR residential mortgage lending.
The Reserve Bank has said it could implement more than one tool at a time.
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