Macroprudential Policy prompts LVR Review

Macroprudential Policy prompts LVR Review

Venkat Raman

Auckland, May 27, 2019

RBNZ Deputy Governor Geoff Bascand (Picture Supplied)

The Reserve Bank of New Zealand has undertaken a detailed evaluation of Loan-to-Value Ratio restrictions (LVR) as a part of a wider review of Macroprudential Policy.

Deputy Governor and Financial Stability Head Geoff Bascand said that by improving the resilience of households and banks, the LVR Policy has played a useful role in promoting financial stability during a period of heightened housing market risks.

The evaluation covers the impact of LVRs on financial stability, efficiency and other public policy objectives such as competition and housing affordability.

RBNZ published other papers on May 22, 2019 to explain the role of macroprudential policy, how the policy is conducted, and its effectiveness at enhancing financial stability.

Mr Bascand said that Macroprudential Policy aims to limit the adverse impact of boom-bust cycles in the financial system and is one of several ways the Reserve Bank helps to maintain financial stability.

“This work is timely. Macroprudential was established as a new policy function in 2013, and based on the experience of the past five years we’ve updated our strategy for using the tools,” Mr Bascand said.

The real purpose

He said that Macroprudential policy is not about eliminating risks for banks and households, reducing house prices, or managing the business cycle. Affordability pressures on the housing market and the rental market require a much broader policy response.

“Other Macroprudential Policy measures could also be used to build additional capital and liquidity buffers in the banking system, so that banks could support the economy under stress. RBNZ recently consulted on a more prominent role for a macroprudential tool called a counter-cyclical buffer,” Mr Bascand said.

It is understood that the second phase of the Review of the Reserve Bank Act will include consultation on options for the future macroprudential framework. The Bank’s evaluation of Macroprudential policy and LVRs has been completed to assist this review.

Mr Bascand said that RBNZ believes that it should retain the ability to use macroprudential policies, supported by clear and transparent communication of how they can be used.

About LVR

LVR is a measure of how much a bank lends to a borrower, relative to the value of the borrower’s property secured against the lending.

The more the banking system as a whole lends to high-LVR borrowers the greater the risk that the banking system will suffer large losses in a severe downturn. If banks do suffer large losses they may become unwilling to continue lending to the wider economy. Experience in other countries suggests this can have a damaging and lasting effect on the economy.

RBNZ introduced LVR restrictions in October 2013 in response to financial stability risks associated with a potential house price correction and high-LVR mortgage lending, and has adjusted policy settings in response to changing risks.

The Reserve Bank had considered, but decided against, Capital Macroprudential Tools instead of the LVRs, although Baseline Capital Rules for high-LVR loans were tightened.

The LVR restrictions tend to have a greater impact in directly reducing housing and household sector risks, and in mitigating the scale of an economic downturn, than capital-based macroprudential tools that are focused on building additional bank capital buffers for absorbing shocks.

This review traces changes in the LVR policy over the past five years, analyses the effect they have had on banks and households, and asks what the Reserve Bank can learn from this experience.

Related posts

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: