The Reserve Bank has refreshed its strategy for using macroprudential policy six years after its implementation.
At a conference hosted by Otago University, Deputy Governor Geoff Bascand said “financial stability is important for the
wellbeing of New Zealanders, and macroprudential policy is a key line of defence for safeguarding financial stability.
Our refreshed strategy on macroprudential policy provides us with greater clarity on how we will use macroprudential
tools in the future, and provides New Zealanders with the confidence they need that the financial system is in good
hands.”
When risks are heightened, the Reserve Bank uses macroprudential tools to complement other financial regulation, such as
capital requirements. That reduces the likelihood and severity of threats to the financial system, and mitigates the
adverse impact on the economy.
In the macroprudential toolkit the most well-known tool is the loan-to-value ratio policy (LVR) which improves the
resilience of mortgage loans. There are also capital and liquidity tools that build additional buffers for banks,
putting them in a better position to keep lending to the economy should things take a turn for the worse.
Mr Bascand said that the refresh to the strategy was informed by our experience using the LVR tool. “The Reserve Bank’s
LVR restrictions have been successful in reducing some of the risk associated with high household indebtedness. Our
analysis showed that as a result of introducing the LVR policy, resilience of the banking system has increased, while
side effects have been limited, and that’s a good outcome.”
Commenting on the outlook for LVRs, Mr Bascand noted that further easing in LVRs is possible if risks decline, which
requires continuing subdued growth in credit and house prices and banks maintaining prudent lending standards. “So that
tools can be utilised when they need to be, the Reserve Bank needs to maintain operational independence in
macroprudential policy, supported by transparent communication and clarity about its objectives, Mr Bascand said.
“While macroprudential policy cannot be used to eliminate all risks for banks and households, or sustainably lower house
prices, or manage fluctuations in economic activity, it does however play an important role in supporting a healthy
financial system.”
The government is reviewing the role and powers of the Reserve Bank as they relate to financial stability, including
whether the macroprudential framework remains fit for purpose.