Macro-prudential policy


Macroprudential policy aims to limit the serious and lasting consequences of boom-bust cycles for the financial system, the economy and society. It is one part of the Reserve Bank’s toolkit for maintaining financial stability – the consistent supply of financial services that the economy relies on.

Macroprudential policy can reduce the impact of a stress scenario on the financial system and wider economy by:

  • building additional resilience in the financial system, so that banks can support the economy even when it is under stress;
  • reducing risky mortgage lending, so that banks have fewer losses to absorb.

A 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.

Watch the Booms, busts and the way between video.

See Macro-prudential policy – FAQs for responses to frequently asked questions about macro-prudential policy.

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.

Framework document

The framework document for macroprudential policy outlines the purpose of the tools and how they transmit to financial stability. It is intended to improve the quality, predictability and transparency of the Reserve Bank’s decision making, and provides a basis for holding the Reserve Bank to account for its macroprudential policy decisions.

The Reserve Bank will consult the public on proposals to introduce new macroprudential tools, and report on macro-prudential policy in the Financial Stability Report. The framework document will be updated from time to time to reflect legislative and policy changes.

Macroprudential policy framework: Mitigating boom-bust cycles in the financial system (PDF 1.30MB)

High loan-to-value ratio restrictions

Limits on high loan-to-value ratio (LVR) residential mortgage lending were put in place in October 2013, and are the only macro-prudential tool used to date. High-LVR lending restrictions were changed on 1 January 2019 and vary depending on whether the borrower or tenants occupy the property.

More information is available on the Loan-to-value ratio restrictions page.

The Reserve Bank has undertaken a detailed evaluation of the LVR policy – the only macroprudential tool used to date. The evaluation covers their impact on financial stability, efficiency and other public policy objectives such as competition and housing affordability.

Bulletin article: Review of the Reserve Bank’s loan-to-value ratio policy (PDF 976 KB)

Analytical note: Has the loan-to-value ratio policy improved the resilience of the banking system? (PDF 1002 KB)

Debt to income (DTI) limits

The Reserve Bank has suggested that serviceability restrictions such as DTI limits would be a useful addition to the tools allowed under the Memorandum of Understanding. If they were added and the Reserve Bank elected to enact them in the future, DTI limits would limit the share of residential mortgage borrowers able to obtain large loans relative to their income. In June 2017, the Reserve Bank consulted the public about this.

View the consultation on serviceability restrictions as a potential macroprudential tool in New Zealand.