NZD/USD Flat after Reserve Bank Releases Financial Stability Report

The New Zealand Dollar is showing little response early Wednesday to the release of the Reserve Bank of New Zealand’s Financial Stability Report. In the report, the RBNZ said that financial system risks have eased, but remain high. It also said slower mortgage lending growth and house price inflation have reduced risk.

Easing LVR Restrictions

The RBNZ said it would ease loan to value restrictions (LVR’s) from the start of 2019. Banks will now be able to provide 20% (up from 15%) of new owner-occupier loans to owner-occupier borrowers with less than a 20% deposit. Banks will also be able to provide 5% of new investor loans to investor borrowers with less than 30% (lowered from 35%).

Global Economy Vulnerable to Shocks

The RBNZ said high debt and asset prices mean the global economy remains vulnerable to shocks. Additionally, high debt levels mean NZ households remain vulnerable to financial risk.

Banks Need to Take More Responsibility

However, the central bank went on to say that recent slower mortgage lending growth has reduced financial risk somewhat. It also recommended that banks need to better manage their conduct risk and lend responsibly.

Higher Capital Requirements Are Necessary

The RBNZ also suggested that longer-term, financial firms need to manage risks from climate change. Additionally, it noted that their preliminary view indicated that higher capital requirements are necessary.

Furthermore, the RBNZ said it will reassess whether the banking system has enough capital to weather future extreme shocks.

Domestic Banking System Sound

Finally, the RBNZ also said the domestic banking system remains sound and mortgage credit growth and house price inflation have eased to more sustainable rates.

RBNZ Governor Orr Speaks

RBNZ Governor Orr also spoke, saying the Reserve Bank’s home lending restrictions are “in place now and forever”. Additionally, with the housing market cooling since October 2013 when LVR restrictions were first implemented, Orr told reporters the RBNZ was “some way away” from further changing the lending limits.

He also offered some clues as to where the Reserve Bank sees LVRs heading in the not too distant future. “I would say over the next 6-12 months [we would be] providing as best as we can a flight path that sets out a timeline about how we think about LVRs going forward.”

Banks Have to Take More Responsibility

Orr also said how banks behave was the Reserve Bank’s single biggest issue with LVRs…It really comes down to banks’ responsibility”.

“Are they going to be responsible lenders and avoiding the types of issues that we’re talking about or are we going to have to retain, or increase again, the LVRs?”

“In a sense, these are speed limits and we want people to stay within the speed limits without us having to change the signs each week.”

In fact, he said any future changes to LVRs would “only ever be altered according to lending conditions”, including housing demand and the tax environment.

LVRs are Here to Stay

“The LVRs are in place now and forever – just what level they are set at is going to be a function of all that complexity around what is facing this industry.”