The Reserve Bank says in its latest Financial Stability Report that it is 'imperative' to improve New Zealand’s financial system resilience while conditions are conducive

The Reserve Bank says in its latest Financial Stability Report that it is 'imperative' to improve New Zealand’s financial system resilience while conditions are conducive
Adrian Orr by Jacky Carpenter.

The Reserve Bank has left the settings on the loan to value ratio (LVR) restrictions unchanged in its latest Financial Stability Report (FSR), as well as talking up the need for banks to hold more capital.

In its previous six-monthly FSR in November last year the RBNZ announced relaxation (for the second time) of the LVR rules. This took effect in January and the RBNZ says the impact of the relaxation of the rules is still being assessed. 

In the FSR released on Wednesday RBNZ Governor Adrian Orr said the current LVR settings "remain appropriate for now", with any further easing subject to continuing subdued growth in credit and house prices and banks maintaining prudent lending standards.

The RBNZ says if household lending risks continue to fall gradually, LVR restrictions will continue to be steadily eased.

"That will require household lending and house price growth to remain at sustainable levels, and banks to maintain prudent lending standards. We expect to review LVR restrictions every six months, unless conditions change suddenly." 

Bank economists reviewing the latest RBNZ statement were of a view that it was likely the central bank would again relax the LVR rules when it puts its new FSR out later this year, in November.

ANZ chief economist Sharon Zollner and economist Michael Callaghan said they expected that the LVR policy will be eased again in November as housing market risks continue to decline and banks’ lending standards for new mortgages remain prudent.

"The focus from here will be on developments in house prices, credit growth, and credit lending standards."

Westpac senior economist Michael Gordon said he thinks that the RBNZ will continue to ease the LVR restrictions over time, as it moves away from a reliance on ‘macroprudential’ polices in favour of ‘microprudential’ measures such as bank capital requirements.

"Whether we see another LVR easing as soon as November will depend on how the housing market responds to the recent stimulus from a sharp drop in mortgage rates and the ruling out of a capital gains tax."

The RBNZ is currently in the middle of moves to get banks to increase their capital levels. The banks are resisting strongly, insisting that the levels of capital the RBNZ is pushing for are far too conservative and will push up borrowing costs for customers.

Orr said on Wednesday that within New Zealand, debt levels are high in the household and dairy sectors, leaving borrowers and lenders exposed to unanticipated events. Similar challenges exist globally, given current high public and private debt levels, and stretched asset prices in many of New Zealand’s trading partners.

"The capacity for some foreign governments and central banks to respond to unanticipated negative events is also limited by their current high government debt and low nominal interest rates. It is imperative to improve New Zealand’s financial system resilience while conditions are conducive."

This is the statement issued by RBNZ Governor Adrian Orr:

Tēnā koutou katoa, welcome all.

The New Zealand financial system remains resilient to a broad range of economic risks. However, financial system risks remain elevated, and ongoing effort is necessary to bolster system soundness and efficiency.

Domestically, debt levels are high in the household and dairy sectors, leaving borrowers and lenders exposed to unanticipated events. Similar challenges exist globally, given current high public and private debt levels, and stretched asset prices in many of New Zealand’s trading partners.

The capacity for some foreign governments and central banks to respond to unanticipated negative events is also limited by their current high government debt and low nominal interest rates. It is imperative to improve New Zealand’s financial system resilience while conditions are conducive.

Increasing financial institutions’ capital positions is central to ensuring that they can withstand severe shocks. We have proposed higher capital requirements for banks, and are currently reviewing public submissions on this proposal. There is also a need for some insurers and non-bank deposit takers to improve their capital buffers. We will be reviewing insurer solvency standards in the months ahead.

Financial resilience also includes service providers taking a long-term customer outcome focus, to both maintain confidence and promote sound resource allocation. We will ensure banks and insurers respond to the issues identified in our recent review of their conduct and culture.

A longer-term focus is also necessary for financial firms to adapt to the changing competitive, regulatory, and natural environment.

Insurers are changing how they manage their exposure to natural disaster events, which is altering affordability. Risks associated with climate change are also impacting on the accessibility of insurance, with potential flow-on effects on bank lending. These risks must be appropriately identified and priced, so as to best ensure a stable transition over coming years.

The Reserve Bank’s loan-to-value ratio (LVR) restrictions have been successful in reducing some of the risk associated with high household indebtedness. The current LVR settings remain appropriate for now, with any further easing subject to continuing subdued growth in credit and house prices and banks maintaining prudent lending standards.

Ngā mihi, thanks.

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Sounds like Orr is getting more worried about our trading partners and external shocks as time goes on. I agree with him and nice to see him looking outside small NZ to make policies

LVR's remaining "as is" goes some way in insulating the financial system from from the fallout of mass low deposit (underwater mortgages) when/if a shock comes. The RBNZ is helping protect the naive from suffering even more financial fallout of their own poor judgement. There's certainly major risks building and the RBNZ knows it. With stretched asset values prevailing, there is only one thing worse than record low interest rates and that's allowing 5% deposit mortgages to prop up this facade property Spruikers label "economic prosperity".

Can the RBNZ deny it's monetary policy actions, which saw OCR interest rates more than halved since April 2015, expose captured ("sticky") bank depositors to inadequate risk adjusted returns to compensate for OBR haircuts?:

...The Reserve Bank has also improved its ability to manage distress in a
financial institution by introducing an outsourcing policy and the Open
Bank Resolution scheme. PDF page 3 (9 of 48)

Given this indefensible regulatory failure could turn out to be the cause:

The proportion of risky borrowers in the household and dairy sectors appears relatively high. Around two-thirds of households have no mortgage debt, but nearly 40 percent of new mortgage loans are to borrowers with DTI ratios above five. In the dairy sector, 35 percent of debt is to highly indebted farms, defined as farms with more than $35 of
debt per kilogram of milk solids produced annually. PDF page 7 (13 of 48)