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The Reserve Bank made a shocking announcement that it will consult next month on the possible reintroduction of high loan-to-value (LVR) loan limits at banks early next year, and acknowledges that it is now seeing a ” rapid growth in loans to riskier investors. ” .
The move, to reintroduce LVRs in March, is in effect a 180-degree turn by the central bank and dates back to its commitment to lift LVRs for at least 12 months. It will inevitably lead to questions about whether the RBNZ can now revert to its previously announced, and reiterated commitment to leave the official cash rate unchanged at 0.25% for 12 months. so at least until march next year.
The RBNZ also surprisingly announced on Wednesday that it is further delaying the introduction of new bank capital requirements until July 2022. These were initially delayed earlier this year until 2021.
The impact value of the LVR announcement is its timing, which is very surprising ahead of two normal RBNZ major announcements, namely the latest Monetary Policy Review to be held later on Wednesday and the Financial Stability Report to be released. in two weeks.
By rushing the announcement now, the RBNZ is signaling through its actions that the housing market is clearly slipping away.
The RBNZ lifted the LVR restrictions in May this year, reportedly for at least 12 months.
LVR restrictions, originally established in 2013, are used to reduce risks to the financial stability of riskier loans. At the time they were lifted, LVR restrictions required investors to have 30% of deposits for homes, while in terms of loans to owner-occupants, banks were limited to only 20% of their new loans for loans greater than 80% of the value of a property.
The decision to remove LVRs always seemed extremely risky.
In the RBNZ statement on Wednesday, Lieutenant Governor Geoff Bascand said the decision to eliminate LVRs earlier this year was made “to ensure that credit could flow and that they would not have an undue impact on the implemented mortgage deferral scheme in response”. to the Covid-19 pandemic “.
“Circumstances in the loan market have improved since then and we are now seeing rapid growth in loans for riskier investors. We will consult about the reinstatement of the restrictions that we had before Covid, which limited the amount of subprime loans that banks could make, “said Bascand.
The most surprising thing about both announcements is that they anticipate the Monetary Policy Review scheduled by the RBNZ on Wednesday and only two weeks before the next scheduled Financial Stability Report, which would normally be considered the forum to deal with topics such as LVRs and bank capital. .
The RBNZ’s twin announcements would suggest great urgency on your part and an acknowledgment that the housing market is beginning to seriously overheat.
RBNZ Governor Adrian Orr had fired warning shots last month that the central bank was considering reintroducing LVRs. Since then, however, the housing market appears to be getting hotter.
Meanwhile, the RBNZ also says that its moratorium on banks that pay dividends and redeem bonds, launch in aprilIt will continue until at least March 31 of next year “to support the stability of the financial system.” Furthermore, the RBNZ has written to insurers telling them that it expects them to only pay dividends if it is prudent to do so, considering its own stress tests and the elevated risks in today’s environment.
This is the RBNZ announcement:
The Reserve Bank – Te Pūtea Matua is further delaying the start of bank capital increases until 2022 to allow banks to continue to have room to respond to the effects of the COVID-19 pandemic and support the economic recovery.
This delay supports other actions the Reserve Bank has taken to cushion the initial economic blow of COVID-19 by promoting cash flow and confidence in the financial system.
“The actions of the Reserve Bank during this period have promoted monetary and financial stability and have provided broad support to the Government, financial institutions and New Zealanders,” says the deputy governor and general manager of financial stability of the Reserve Bank, Geoff Bascand.
“COVID-19 has emphasized the importance of buffers in the financial system. The more capital a bank has, the better it can weather economic storms and meet customer needs in tough times.
“Delaying the implementation of parts of the capital review decisions for an additional 12 months strikes the right balance between providing more scope for banks to support loans now by using their capital buffers, while ensuring that levels capital gains in the long term to support financial stability. “
The Reserve Bank remains committed to increasing capital requirements in the medium term to shore up financial stability, Bascand says.
The changes mean that the increase in the Prudential Capital Buffer will not begin until July 2022. The Reserve Bank will reconfirm this calendar near the end of 2021 and will consider further amendments to the calendar if conditions warrant. Other aspects of the capital reforms will proceed from July 1, 2021, including the new rules on equity instruments. More details on this will be released on November 17.
Reserve Bank will inquire about loan-to-value (LVR) restrictions
Meanwhile, in December, the Reserve Bank will consult on the reinstatement of loan-to-value (LVR) restrictions on subprime loans as of March 1, 2021.
LVR restrictions are used to reduce risks to the financial stability of riskier loans. The restrictions were removed in May to ensure that credit could flow and that they did not have an undue impact on the mortgage deferral scheme implemented in response to the COVID-19 pandemic.
“Circumstances in the loan market have improved since then and we are now seeing rapid growth in loans for riskier investors. We will consult on the reinstatement of the restrictions we had before COVID, which limited the amount of subprime loans that banks could make, ”says Bascand.
Bank dividend restrictions will remain in effect
The Reserve Bank also announces that restrictions on dividends and the redemption of non-ordinary Tier 1 (CET1) instruments implemented in April 2020 will remain in effect until March 31, 2021, or later if necessary. This will continue to support the stability of the financial system.
Reserve Bank updated expectations on insurers’ dividends
The Reserve Bank has also written to insurers to inform them that it has updated expectations on dividends. The Reserve Bank expects insurers to pay dividends only if it is prudent for them to do so, taking into account their own stress tests and the high risks in the current environment.
