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Reserve Bank Deputy Governor says RBNZ looking for more 'broad-based' support for the bank's macro-prudential framework; talks up merits of debt-to-income limits

Reserve Bank Deputy Governor says RBNZ looking for more 'broad-based' support for the bank's macro-prudential framework; talks up merits of debt-to-income limits

By David Hargreaves

The Reserve Bank's looking for more "broad-based support" for its macro-prudential framework, and has also again put in a plug for the merits of debt-to-income ratios as part of the macro-pru measures.

These comments were made in a speech on Wednesday by Deputy Governor Grant Spencer.

"Thinking more broadly about the macro-prudential framework, we will seek to achieve more broad-based support by ensuring that the policy framework is understood by stakeholders, including the public, he said.

"It should be positioned consistently with our macro-financial monitoring and our micro-prudential policy and supervision. Policy adjustments should follow a systematic and well-articulated process in response to emerging systemic risks. It is important to be clear what macro-prudential policy can and cannot achieve. For example, while macro-prudential policies can help reduce housing-related risk in the banking system, they cannot control house price inflation."

These broad macro-prudential framework issues will be jointly examined next year by the Reserve Bank and Treasury when the Bank’s Memorandum of Understanding with the Minister of Finance comes up for review.

The RBNZ attempted to get debt-to-income limits inserted into the menu of macro-pru tools that it has, but the Government pushed back, insisting that it consult on such a measure before any decisions were made about whether it could be included. This resistance from the Government was despite the RBNZ's assurances that it would not use DTIs at the moment.

The RBNZ is currently consulting on DTIs.

Spencer, who has spoken enthusiastically about DTIs before, said the RBNZ regarded them as complementary to the LVR speed limits (which the RBNZ has been using since 2013).

"Limits on DTIs reduce the likelihood of a mortgage borrower defaulting, in response to interest rate or unemployment shocks, while lower LVRs help to reduce the risk of banks facing losses arising from a default.

"They are not just two types of hammer hitting the same nail. 

"Of course, banks already investigate borrowers’ repayment capacity when deciding whether to grant a loan as part of prudent banking practice.

"At times, however, high volumes of high-DTI lending can contribute to a build-up of risk across the financial system which individual banks may not take fully into account. This is why the IMF and the Reserve Bank believe it is appropriate to have this tool in the macro-prudential toolkit, even though we would not wish to use it while the Auckland and national housing markets continue to moderate," Spencer said.

This is the media statement the RBNZ put out summarising Spencer's speech:

The Reserve Bank aims to improve the effectiveness of its prudential regulation through a combination of simpler regulations and bolstering its supervisory activities.

Deputy Governor Grant Spencer said in a speech to the Kanga News Capital Markets Conference today that the Bank is considering how it might improve its regulatory framework.  Two catalysts in this regard are the recent IMF Financial Sector Assessment Program (FSAP) report, and the Bank’s recently initiated review of bank capital adequacy.

“We must maintain the high international reputation of the New Zealand financial system.  Within that, we seek to maintain and build on the Bank’s non-intrusive supervisory approach and simple-yet-conservative prudential requirements.

“Compliance with the international prudential frameworks is not always a black and white choice.  The Basel framework sets minimum standards for key prudential requirements, but often offers a menu of choices within those standards, for countries to tailor to their specific circumstances.  A small country like New Zealand implicitly has a greater degree of freedom.

“We will continue to place emphasis on getting the right incentives in place for prudent institutional governance, supported by effective market discipline that increasingly makes use of technology advances,” Mr Spencer said.

“We want to simplify the current regulatory regime in a number of areas, but also heed the IMF’s advice about improving the effectiveness of our supervisory model.  The IMF has recommended an increase in resourcing to achieve this.

“We believe the supervisory regime could be usefully bolstered through increased use of thematic reviews on topics of broad prudential interest.  We are also looking to make greater use of targeted reviews by external experts in cases where serious non-compliance becomes apparent at particular institutions.

“With regard to the current review of bank capital adequacy, we are leaning towards simplifying both the allowable capital instruments and the methods for measuring risk, though we are in the consultative phase and far from making any decisions.  We do not believe that New Zealand’s relatively vanilla banking system warrants a high degree of complexity in its capital regime.”

Mr Spencer said that the Bank will also review the minimum capital ratios.  New Zealand’s relatively high-risk profile, due to high industry and portfolio concentration, supports a conservative approach relative to international peers.

He added that the Bank is mindful of inefficiencies that can be created if its prudential requirements needlessly or disproportionately add to the cost of financial intermediation, stifle innovation or disadvantage some institutions over others.

“The Bank sees its current Dashboard project as an important step in an on-going effort to support and enhance more effective and efficient disclosure for banks, insurers and other financial institutions.”

The Bank will explore how the macro-prudential framework can be made more robust through a stable and well-signalled policy process.  The Bank will also be applying its key principles of simplicity, incentive alignment and conservatism in the upcoming review of the Insurance (Prudential Supervision) Act.

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DTI regs will allow those that have high income get more leverage and most times (with property anyway) do well, and those that have low incomes struggle (as per normal) to save and therefore borrow and get ahead. The bank has to be able to invest in good ideas no matter what the income of the person with the good ideas. That's basic capitalism.