Sector weighs Reserve Bank lending tools

Kirk Hope, head of the Bankers' Association, says LVR restrictions would limit the ability of some would-be borrowers to borrow. Photo / Supplied

Regulating loan-to-value rations would not be favoured option, believes banking group.

Reading between the lines of what the Reserve Bank has said about the macroprudential tools it is working on, regulating loan-to-value ratios would not be its favoured option, believes the Bankers' Association.

"While they may be in the throes of preparing the tool I don't get the sense they are overly convinced about it," said Kirk Hope, chief executive of the banks' industry body.

Restrictions on high-LVR housing loans would typically be applied when growth in such lending, and in house prices, was judged to be excessive, the Reserve Bank said, with the objective of dampening the housing cycle and strengthening the resilience of banks and households.

But the effectiveness of this approach might be limited by the fact that LVR restrictions - unlike the other tools it is working on - do not affect the cost of borrowing but rather restrict the ability of some would-be borrowers to borrow, it said.

"While this may constrain some households, it is also possible demand from others with sufficient wealth might continue to drive house price growth."

Governor Graeme Wheeler has noted, albeit in a non-committal way, that some countries that have adopted LVR restrictions have exempted first-home buyers.

But those borrowers would make up the bulk of higher LVR lending, Westpac economist Michael Gordon said, so exempting them would limit the effectiveness of the policy.

The Reserve Bank also acknowledged the risk that borrowers bypass New Zealand banks and borrow from foreign banks or entirely unregulated lenders, as in the days when solicitors' trust accounts were a significant source of home loans.

Hope said that when looking at the limited experience of LVR restrictions in other developed countries it was important to bear in mind the differences between their circumstances and New Zealand's.

In Canada and Hong Kong lending above the LVR limit is not prohibited - it only means that mortgage insurance is compulsory for those borrowers, increasing the cost to them.

In Canada's case it also imposed a large fiscal risk on the Government. In Hong Kong's case, having a currency pegged to the US dollar means it has outsourced its monetary policy to the Federal Reserve.

Of the other tools under consideration, Hope believes raising the risk weights, and therefore the capital requirements, for lending to a particular sector, such as residential mortgages, would be the Reserve Bank's preferred option.

"They have already implemented it in the agricultural sector."

The Reserve Bank is already, as their regulator, looking a whether the banks' internal models adequately risk-weight home loans, especially those with high LVRs.

Gordon said the Reserve Bank's focus was largely on using macroprudential tools to provide a buffer against downturns, rather than using them to lean against credit market upturns ,"which seems to be what those who calling for their immediate use have in mind".

"In most cases the way these tools would work against a credit upswing is by increasing the cost of borrowing. So in that sense they are not an alternative to interest rate management. In fact they are probably inferior to tools such as the official cash rate, as estimates suggests that the impact they would have on borrowing rates would be small."

The Reserve Bank has consistently said it regards the tools as means to strengthen the resilience of the financial system and not as instruments for the conduct of monetary policy.

Over the cycle they might mean monetary policy did not have to work as hard, but they should not be seen as alternatives to the official cash rate.