Macro-prudential policy
Background
Following the Global Financial Crisis, there has been considerable international focus on reducing risks to the financial system. This has led to the development of a policy approach known as ‘macro-prudential policy’, which uses prudential instruments to manage the system-wide (systemic) risks that can develop during boom-bust financial cycles. Macro-prudential policy aims to promote greater financial system stability by:
- building additional resilience in the financial system during periods of rapid credit growth and rising leverage or abundant liquidity; and
- dampening excessive growth in credit and asset prices.
This short video – Booms, busts and the way between – explains the role of macro-prudential policy and the tools the Reserve Bank has to smooth out boom-bust cycles.
See Macro-prudential policy – FAQs for responses to frequently asked questions about macro-prudential policy.
Temporary restrictions on high-LVR residential mortgage lending
In December 2013, the Reserve Bank announced it would introduce an exemption for high-LVR construction lending. Questions and Answers about the construction lending exemption were also released. A related consultation paper (PDF 129KB) and draft of BS19 (PDF 301KB) were released on 20 December 2013.
In August 2013, the Reserve Bank announced its intention to implement temporary restrictions on high loan-to-value ratio (LVR) residential mortgage lending. From 1 October 2013, banks must restrict new residential mortgage lending at LVRs over 80 percent (deposit of less than 20 percent) to no more than 10 percent of the dollar value of their total residential mortgage lending. The Reserve Bank also released a Regulatory Impact Assessment (PDF 677KB) of this policy. More information, including the details of all macro-prudential policy consultations, is available on the macro-prudential policy implementation page.
See LVR– FAQs for responses to frequently asked questions about loan-to-value ratio restrictions.
Memorandum of Understanding on Macro-Prudential Policy
In May 2013, the Minister of Finance, Hon Bill English, and Reserve Bank Governor, Graeme Wheeler, signed a Memorandum of Understanding (MOU) on Macro-Prudential Policy. The MOU outlines the governance arrangements for the use of macro-prudential tools that are designed to promote greater financial system stability. The MOU sets out four macro-prudential tools in the New Zealand context:
- the countercyclical capital buffer (CCB)
- adjustments to the minimum core funding ratio (CFR)
- sectoral capital requirements (SCR)
- temporary restrictions on high loan-to-value ratio (LVR) residential
mortgage lending.
Key resources
- Response to Submissions (PDF 245KB) and revised “Framework for restrictions on high-LVR residential mortgage lending” (BS19) (PDF 252KB), August 2013.
The Reserve Bank’s final framework for the operation of LVR restrictions following consultation.
- A new macro-prudential policy framework for New Zealand – final policy position (PDF 305KB) May 2013.
The Reserve Bank’s final macro-prudential policy position following consultation.
An opinion piece from the Reserve Bank Governor, Graeme Wheeler, explaining why LVR restrictions were introduced.