Macro-prudential policy FAQs

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Macro-prudential policy uses regulatory instruments to help reduce the system-wide (or “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.

The Global Financial Crisis (GFC) showed how instability in the financial system can result in significant economic disruption, placing substantial financial stress on households and businesses, and considerable pressure on government balance sheets.

Since the GFC, there has been considerable international focus on reducing risks to the financial system. These risks may result from a build-up of debt and excessive credit and asset price growth. They may also arise from the financial system’s reliance on unstable sources of funding.

This has led to a growing international consensus that regulatory frameworks focusing primarily on the stability of individual financial institutions may not always be sufficient in managing risks to the financial system as a whole. Macro-prudential policy builds on the existing prudential framework to further promote financial system stability.

For the background economic context to the introduction of macro-prudential policy in New Zealand, refer to the introduction of macro-prudential policy (PDF 109KB)

The Reserve Bank has identified four macro-prudential tools that may have a role to play in promoting financial system stability in New Zealand. These are:

  • the countercyclical capital buffer (CCB)
  • adjustments to the minimum core funding ratio (CFR)
  • sectoral capital requirements (SCR)
  • restrictions on high loan-to-value ratio (LVR) residential mortgage lending.

Macro-prudential tools would not replace the existing regulation of banks already carried out by the Reserve Bank, but they would be supplementary tools, used from time to time to help manage credit cycle risks. They would be temporary in nature, with macro-prudential restrictions being lifted as risks abate.

LVR restrictions came into effect on 1 October 2013. For more information on the framework for LVR restrictions, and the RBNZ’s early experience in operating them, refer to An A to Z of loan-to value ratio restrictions (PDF 392 KB). More information about LVR restrictions is also found in these frequently asked questions.

More details about the other macro-prudential tools can be found in the final macro-prudential policy position paper (PDF 305KB).

The Reserve Bank’s mandate for macro-prudential policy stems from its legislative purpose of “promoting the maintenance of a sound and efficient financial system” (section 1A Reserve Bank of New Zealand Act 1989).

The powers to implement or adjust countercyclical capital buffers, the minimum core funding ratio, sectoral capital requirements and restrictions on loan-to-value ratios for residential lending are referred to under section 78 of the Reserve Bank of New Zealand Act.

More details about the Reserve Bank’s prudential powers can be found in the final macro-prudential policy position paper (PDF 305KB).

Choosing the right tool would depend on the circumstances of the financial system at the time.

For an overview of the RBNZ’s new macro-prudential policy framework and governance arrangements surrounding it, refer to a new approach to macro-prudential policy for New Zealand (PDF 319KB).

There will be consultation with the Minister of Finance and the Treasury before any macro-prudential tools are used. A Memorandum of Understanding (MOU) between the Minister and the Reserve Bank sets out expectations for macro-prudential policy accountability and transparency. The MOU sets out the agreed objectives, instruments and operating guidelines for macro-prudential policy.

The following indicative notice periods for the imposition of macro-prudential requirements will apply, via banks’ conditions of registration.

Instrument Notice period
Countercycle capital buffers Up to 12 months
Sectoral capital requirements Up to 3 months
Adjustments to core funding ratio Up to 6 months
Restrictions on high-LVR housing lending At least 2 weeks

Temporary limits on high loan-to-value ratio (LVR) residential mortgage lending have been in place since October 2013. LVR lending restrictions changed from 1 November 2015 and vary by where mortgaged property is located and who lives in it.

For more information on the LVR consultation history, together with news and updates on LVR restrictions (including exemptions) refer to the loan-to-value ratio restrictions page.

Macro-prudential tools are not monetary policy tools. The role of macro-prudential tools is to enhance financial stability by increasing the resilience of the banking system during periods of rapid credit growth and by helping to dampen excessive growth in credit and asset prices. The tools may provide support for monetary policy but they should not be viewed as alternative tools to the Official Cash Rate. Moreover, they are not expected to be used continuously.
A counter-cyclical capital buffer would be applied during periods of very strong credit growth to help ensure the banking system has an additional cushion against losses or sharp increases in risk-weighted assets that may be associated with an economic downturn or significant financial system distress. Sectoral capital requirements are a more targeted option that would apply against lending to a particular sector.