22 May 2019
LVR restrictions promote financial stability, evaluation finds
The Reserve Bank has undertaken a detailed evaluation of Loan-to-Value Ratio restrictions (LVR) as part of a wider
review of macroprudential policy.
“By improving the resilience of both households and banks, LVR policy has played a useful role in promoting financial
stability during a period of heightened housing market risks,” Deputy Governor and Head of Financial Stability Geoff
Bascand said.
The evaluation covers the impact of LVRs on financial stability, efficiency and other public policy objectives such as
competition and housing affordability.
Along with the evaluation of LVR policy, the Reserve Bank today published other papers that explain the role of
macroprudential policy, how the policy is conducted, and its effectiveness at enhancing financial stability.
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.
“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,” Mr Bascand said.
He said that 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. The Reserve Bank has recently consulted on
a more prominent role for a macroprudential tool called a counter-cyclical buffer.
Phase 2 of review of the Reserve Bank Act will include consultation on options for the future macroprudential framework.
The Reserve Bank’s evaluation of macroprudential policy and LVRs has been completed to assist this review. Mr Bascand
said the Reserve Bank believes that it should retain the ability to use macroprudential policies, supported by clear and
transparent communication of how they can be used.
More information
ends