The Reserve Bank says financial risks have lessened - but it's ruling out further relaxation of bank mortgage lending limits at this stage and is indicating it will wait till "at least" November.
The central bank did loosen the lending limits from January 1 this year.
In delivering his first Financial Stability Report, RBNZ Governor Adrian Orr said said both lending and house price growth had slowed in the past 12 months – in part due to the RBNZ's imposition of loan-to-value (LVR) ratio restrictions.
"This more subdued lending growth needs to be further sustained before we gain sufficient confidence to again ease the LVR restrictions," he said.
Asked at the later media conference when the RBNZ may look at further relaxation of the limits, Orr said the bank would wait "at least" till the next FSR is released in November this year.
Talking more broadly, Orr said the dairy farming sector remains highly indebted.
"Most dairy farms are currently cash-flow positive, but remain vulnerable to any possible downturn in dairy prices and agriculture shocks. Reducing this bank lending concentration risk requires more prudent lending practices."
On the subject of LVRs, the RBNZ said that while house price growth has moderated, the level of house prices remains high relative to household incomes.
"Slowing credit growth and house price inflation have eased risks related to household debt in the past 12 months. Reflecting this, the Reserve Bank announced a small easing of the LVR policy in November 2017 to allow a higher proportion of loans to be made at high LVRs.
"The full effect of this easing is still working through, and no further change in policy settings is deemed appropriate for now. The policy will be eased further in the future if housing market risks decline and banks’ lending standards for new mortgage loans are prudent."
The RBNZ said the growth rates of household debt and house prices have been fairly stable over the past six months.
"Combined with tighter bank lending standards, this suggests the financial system’s vulnerability to household debt has not changed materially since the previous [Financial Stability] Report.
"Ultimately, continued stabilisation, or a further reduction, in the growth rates of household debt and house prices, will be required before the risk to the financial system is normalised.
"Bank lending standards will have an influence over both. Currently, banks expect to keep their lending standards relatively tight for the rest of 2018."
Referencing the recent bombshell revelations around banking and financial advice practices in Australia, Orr said the conduct and culture of banks and insurance companies was "an ongoing driver" of financial soundness.
"These features are being jointly reviewed by the Financial Markets Authority and ourselves, and we will report our findings over coming months."
As expected, Orr put in a plug for the new Bank Financial Strength Dashboard, launched on Tuesday, which is aimed to make it easier for financial information to be compared, such as bank capital buffers, non-performing loans, and risk concentration.
"Our aim is to improve the public’s understanding of their banks, and hence the incentives for banks to operate soundly," Orr said.
He said the banking sector was broadly efficient, "although some lending allocation remains a vulnerability".
"The major New Zealand banks are in the top quartile of OECD banks for their return on assets. Bank services are also wide ranging and of reasonable cost. These outcomes are possible due in part to the low cost-to-income ratios of our major banks, and the current low level of impaired loans."
This is the media statement released by the RBNZ on Wednesday:
Tena koutou katoa, welcome all.
New Zealand’s financial system remains sound. The banking system holds sufficient capital and liquidity buffers, guided by our prudential regulatory requirements. These buffers reduce New Zealand banks’ exposure to adverse shocks.
An ongoing driver of financial soundness is the conduct and culture of banks and insurance companies. These features are being jointly reviewed by the Financial Markets Authority and ourselves, and we will report our findings over coming months.
The financial system vulnerabilities are much the same as we discussed in our previous Financial Stability Report. Household mortgage debt remains high. However, financial risk has lessened with both lending and house price growth slowing in the last 12 months – in part due to our imposition of loan-to-value (LVR) ratio restrictions. This more subdued lending growth needs to be further sustained before we gain sufficient confidence to again ease the LVR restrictions.
In a similar vein, the dairy farming sector remains highly indebted. Most dairy farms are currently cash-flow positive, but remain vulnerable to any possible downturn in dairy prices and agriculture shocks. Reducing this bank lending concentration risk requires more prudent lending practices.
The high dairy-farm indebtedness, and the fact that LVRs were necessary, reflects that banks’ allocative efficiency – eg deciding how much to lend to whom – can be impaired due to the pursuit of short-term, rather than longer-term, profits.
We have launched the Bank Financial Strength Dashboard to make it easier for financial information to be compared, such as bank capital buffers, non-performing loans, and risk concentration. Our aim is to improve the public’s understanding of their banks, and hence the incentives for banks to operate soundly.
The banking sector is broadly efficient, although some lending allocation remains a vulnerability. The major New Zealand banks are in the top quartile of OECD banks for their return on assets. Bank services are also wide ranging and of reasonable cost. These outcomes are possible due in part to the low cost-to-income ratios of our major banks, and the current low level of impaired loans.
The insurance sector as a whole also remains sound, profitable and adequately capitalised, once again guided in part by our prudential regulatory requirements. However, some insurers have relatively small capital buffers necessary to meet future events. We are discussing this directly with the insurers.
We have sought a court order to put one New Zealand licensed insurance company – CBL Insurance Ltd – into interim liquidation in recent months. There will be a full liquidation hearing in the High Court.
There are also challenges to efficiency in the insurance sector. Market share remains concentrated. Life insurance commissions are particularly high, which inevitably flows through into higher premiums. We believe technology developments will be a key driver of competition in the future.
Nga mihi, thanks.
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