Phase two of RBNZ Act review raises the possibility of loan-to-value ratio restrictions being extended from banks to all lenders active in the residential mortgage market

By Gareth Vaughan

The government's review of the Reserve Bank of New Zealand (RBNZ) Act is raising the possibility of loan-to-value ratio (LVR) restrictions being extended from banks to all lenders active in the residential mortgage market.

The RBNZ is currently only able to apply LVR restrictions to registered banks. However, a consultation paper issued as part of phase two of the RBNZ Act review suggests the RBNZ could be empowered to apply them to non-bank deposit takers such as building societies, credit unions and deposit taking finance companies as well, and potentially even to mortgage lenders who don't take deposits from the public.

"This could be desirable, because lending restrictions can potentially be undermined if non-deposit taking lenders are willing to offer the loans that the Reserve Bank has restricted. In many other countries, lending restrictions are applied to all lenders by default, rather than simply to deposit takers, but it would be a significant change in New Zealand," the consultation paper says.

"A compromise may be to apply the restrictions to deposit takers only by default, as in recent changes in Australia, but retain the option of extending the [regulatory] perimeter."

The RBNZ put LVR restrictions in place in 2013. They are a measure of how much a bank lends against mortgaged property, compared to the value of that property. The RBNZ introduced LVR restrictions as a financial stability tool following rapid house price growth and increasing use of low-deposit loans by banks. LVR restrictions are one of four tools in an RBNZ macro-prudential toolkit, enabled by a Memorandum of Understanding (MoU) signed by then-RBNZ Governor Graeme Wheeler and then-Finance Minister Bill English in 2013.

RBNZ data shows housing lending by non-bank lending institutions has been growing strongly. It rose 55%, or just over $1 billion, in the two years to May 2019 to $2.836 billion. However even after that growth, non-bank lenders still only account for 1% of the total $265.668 billion in housing loans, with the other 99% held by banks.

Questions for consultation featuring in the consultation paper include;
Is it appropriate to regulate lending standards (eg LVRs)? How broad should these powers be (should they include other tools such as debt-to-income restrictions)?
Should lending standards apply only to deposit takers or to all lenders?
Should there be special governance arrangements for these tools?
Should the Reserve Bank reconsider its view that these tools should only be applied temporarily?
Other than lending standards, when the Reserve Bank makes time-varying use of standard prudential tools such as capital ratios, are there any concerns or reasons for wider political oversight?

'The RBNZ currently has a legal power to apply DTI policies'

In terms of debt-to-income restrictions, or DTIs, the RBNZ continues to want such a tool added to its macro-prudential toolkit. A DTI tool could be used to limit the extent to which banks are able to provide loans to borrowers that are a high multiple of the borrower’s income. The consultation paper notes the RBNZ "currently has a legal power to apply DTI policies," but its MoU with the government doesn't list them as one of the tools appropriate for cyclical improvements to financial stability.

The consultation paper also says the RBNZ's power to apply LVRs is part of a broader power to direct the design of risk management systems. If powers to control lending standards were written in a more specific way, there would be questions about the precise design, it says.

"For example, a power to 'regulate the size of lending relative to customer income and collateral' would allow for LVRs to be applied to other  sectors, eg commercial property, and also allow for DTIs. This would be quite broad, although still more specific than the existing power, a different wording could give a narrower power," the consultation paper says.

Move to an Aussie-style authorised deposit-taking institutions-style model planned

As part of the RBNZ Act review the government has made an "in-principle" decision to merge the two existing prudential regimes for regulating banks and non-bank deposit takers (NBDTs) into a single regime, a bit like Australia's authorised deposit-taking institutions model.

However, the consultation paper appears to favour leaving lenders that don't borrow deposits from the public outside the "inner perimeter" of regulation. Such lenders obtain their funding through the likes of wholesale markets products such as securitisation, or retail issues of longer dated capital markets products such as bonds, debentures or medium term notes. 

Questions for consultation in the consultation paper do include whether the RBNZ should have the discretion to "extend the perimeter" to avoid regulatory arbitrage, such as designating in entities with business models economically similar to deposit takers.

A 2013 RBNZ review of the prudential regulatory regime for NBDTs considered the possibility of changing the definition of an NBDT to ensure it better caught entities likely to raise systemic risks in the NBDT sector, including through lending as well as borrowing. GE Capital, then the country's biggest finance company, would've been the key entity dragged in, had the regulatory net been extended.

However, the RBNZ ultimately decided entities funded via their parent or other members of their corporate group, such as GE, were carrying on the business of lending their own money rather than money borrowed from third parties. Thus the only persons who would directly suffer financial loss as a result of these entities failing were their owners, the RBNZ said.

GE has subsequently been dismembered, with its former consumer finance unit now known as Latitude Financial Services.

The deadline for submissions on the consultation paper is 5pm on Friday, August 16. Phase 1 of the RBNZ Act review focused on monetary policy.

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