Finance Minister Bill English says he expects to sign a deal with Reserve Bank Governor Graeme Wheeler by the middle of the year on the central bank's so-called macro-prudential tools, but warns they won't be a silver bullet to cool a hot housing market.
"The Reserve Bank and Treasury will finalise arrangements and I expect to sign off a memorandum of understanding with Reserve Bank Governor Graeme Wheeler by the middle of this year," English said in a speech yesterday.
"There are some expectations that these tools will be used immediately to dampen the Auckland housing market. Those decisions will be in the hands of the Reserve Bank. The greatest influence on the housing market will remain interest rates and supply constraints created by the planning system."
"Later this year, the Government will have more to say about how the financial stability tools will work alongside policies on more flexible supply in the housing market and social housing reform," English said.
He noted that under the macro-prudential tool proposals, the Reserve Bank will have a greater ability to influence the amount of lending done by banks and other financial institutions.
This could include requiring lenders to:
· Hold additional capital on their balance sheet as a buffer during an economy-wide credit boom.
· Hold additional capital against loans in specific sectors if risks emerge in those sectors.
· Adjust their funding ratios to use more stable sources of funding to avoid the impact of short-term funding shortages.
· Restrict high loan-to-value ratio lending in the housing sector.
He emphasised that decisions about loan-to-value ratios and bank funding and capital requirements should be made by an independent Reserve Bank rather than politicians.
"The temptation for some politicians to fiddle with the economy for short-term gain at the expense of long-term pain would be too great. In terms of the next steps, the Reserve Bank will publish a consultation paper next month and invite submissions and comments on the proposed financial stability framework," English said.