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Lending by non-deposit taking institutions

An article from the November 2022 Financial Stability Report.

In recent years lending by non-bank institutions that are not funded with deposits has grown much more rapidly than lending by registered banks and NBDTs. Unlike registered banks and NBDTs, non-bank, non-deposit taking lenders (NBNDTs) are not regulated by the Reserve Bank, but we collect data on the sector.

The non-deposit taking sector is highly diverse, with a range of operating structures and business strategies. Non-deposit taking lenders provide a range of services, including personal loans, residential mortgages and property development finance. The sector complements the lending activities of the banking sector by providing loans to borrowers with an adverse credit history or to those who cannot meet the income documentation requirements to obtain a loan from a bank. Some of these borrowers have higher credit risk than those accepted by banks. This risk is reflected in the lending rates of these institutions, which tend to be higher than bank lending rates. Some borrowers switch from non-bank lenders to banks when they have established a better credit history.

Funding sources for non-deposit takers vary across entities. This includes securitising loans, either through bank credit facilities (‘warehousing’) or by selling bonds backed by loans to institutional investors. Other institutions are funded by equity individuals and bond investments by wholesale investors. Finally, some other lenders are structured as managed funds.

Residential mortgage lending by non-deposit taking entities has grown rapidly recently (table D.1). Since 2019, the value of housing lending by non-deposit takers has more than doubled. Lending by banks and NBDTs increased by around 25% over this period. Non-bank lenders (deposit takers and non-deposit takers) have recently accounted for around 7% of new mortgages, similar to the share of smaller banks (excluding the 5 largest banks) (figure D.1).

Table D.1

Residential mortgage lending by banks, NBDTs, and non-deposit lenders

Total mortgage lending ($b) Growth over previous 12 months (%)
Banks NBDTs NBNDTs Banks NBDTs NBNDTs
Aug-19 267.2 0.98 1.91 6.3 0.5 31.3
Aug-20 284.4 1.03 2.35 6.4 4.3 22.9
Aug-21 317.0 1.15 3.32 11.5 12.4 41.3
Aug-22 335.2 1.28 4.82 5.7 10.7 45.0

Source: RBNZ Balance Sheet survey, NBDT Statistical Return, Standard Statistical Return.
Note: Lending by non-deposit taking lenders excludes lending by managed funds.

Figure D.1 New mortgages registered by lenders other than the five largest banks

Source: CoreLogic, Reserve Bank estimates.
Note: This figure plots the share (by count) of property transfers in each month where a mortgage is registered, by the type of institution taking a mortgage over the property.

Download the graph of new mortgages registered by lenders other than the five largest banks (jpg, 320 KB)

Market contacts have suggested the strong lending growth reflects a number of factors, including more flexible access to funding compared to deposit-funded entities, supportive monetary conditions, and lower costs of regulatory compliance. Non-deposit takers also have more flexible lending policies than banks, making them better able to adapt their terms for atypical borrowers.

Non-bank lenders are not directly subject to the LVR speed limits imposed by the Reserve Bank. However, non-banks still have to maintain prudent lending policies in order to obtain funding from investors. For example, banks may impose covenants on the credit facilities they provide to non-banks requiring them to limit high-LVR lending.

In addition to residential mortgage lending, some non-deposit takers focus on financing residential development projects. Bank lending for residential developments has typically focused on projects with high shares of properties that are sold off plans before being completed, to limit risk. Non-deposit takers are more willing to fund development projects with lower pre-sales or that have properties that get sold after being completed (‘spec’ or ‘turnkey’ housing). Developers may also use a combination of bank and non-bank finance structured in a way to meet the risk appetite of both types of lenders, for example through subordination. Market contacts have reported that as the housing market has slowed and pre-sales have fallen, overseas investment funds are also playing an increasing role in financing residential development projects.

We assess that there are limited risks to financial stability from the non-deposit taking sector. Despite this recent strong growth, non-deposit takers’ share of lending is still small, at around 1.4% of the total value of residential mortgage loans outstanding. It is possible that a further slowdown in housing market activity could put some development projects funded by non-deposit takers at risk of being unable to be repaid in full. The exposure of banks to non-deposit takers is relatively low. In addition, retail investors have little direct exposure to non-deposit taking institutions, and the impact of any non-bank lender failure is likely to be mainly on the equity holders and other wholesale investors in these institutions.