Part 1 of a 2-part story on the macroprudential & LVR review
The Reserve Bank released a review of its loan:value ratio (LVR) policy for residential lending yesterday, but hasn’t made a recommendation on ending or changing the policy.
This review is part of an overall review of the Reserve Bank Act.
Phase 2 of the review will include consultation on future macroeconomic policy options.
The review mechanics
The main subject of the review, being undertaken by a joint Reserve Bank-Treasury team, is the financial policy basis for prudential regulation & supervision. Secondly, it will examine the Reserve Bank’s broader governance arrangements.
Phase 2 of the review began in June 2018 and the first consultation stage closed in January. The second consultation stage is set to close “mid-year” and the third stage late this year, resulting in legislation going to Parliament next year.
Evaluation of LVR restrictions
Reserve Bank deputy governor & head of financial stability Geoff Bascand said in today’s release the bank’s evaluation of macroprudential policy & LVRs had been completed, covering the impact of LVRs on financial stability, efficiency & other public policy objectives such as competition & housing affordability.
“By improving the resilience of both households & banks, LVR policy has played a useful role in promoting financial stability during a period of heightened housing market risks,” he said.
The bank also published other papers today (see links below) explaining 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.”
Mr Bascand said macroprudential was established as a new policy function in 2013. What is it, and isn’t it?
“Macroprudential policy is not about eliminating risks for banks & households, reducing house prices or managing the business cycle. Affordability pressures on the housing market & the rental market require a much broader policy response.”
He said other macroprudential policy measures could be used to build additional capital & liquidity buffers in the banking system, so banks could support the economy under stress. The Reserve Bank consulted recently on a more prominent role for a macroprudential tool called a counter-cyclical buffer.
Mr Bascand said the Reserve Bank believed it should retain the ability to use macroprudential policies, supported by clear & transparent communication of how they can be used.
The Reserve Bank has suggested that serviceability restrictions such as debt:income (DTI) limits would be a useful addition to its tools, limiting the share of residential mortgage borrowers able to obtain large loans relative to their income. The bank consulted the public about this is June 2017.
Review of the Reserve Bank’s loan:value ratio policy
Macroprudential policy framework: Mitigating boom-bust cycles in the financial system
Analytical note: Have the LVR restrictions improved the resilience of the banking system?
Phase 2 of the Reserve Bank Act review
Attribution: Reserve Bank paper, LinkedIn.