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Macroprudential tools

This page describes the macroprudential tools or instruments we can use to reduce the risk of 'boom-bust' cycles in the financial system and how we implement them.

Capital and liquidity tools

Capital and liquidity tools transmit directly to financial stability via bank balance sheets. Capital tools (such as the countercylical capital buffer) do this by increasing the amount of capital that banks have available to absorb losses.

Liquidity tools (like the core funding ratio) do this by reducing the vulnerability of banks to disruptions in funding markets.

Our capital and liquidity tools are:

  • countercylical capital buffer (CCyB) – an additional capital buffer we can require banks to meet in an upturn when financial risks are increasing. We can ease the requirement in a downturn to encourage banks to continue lending to credit-worthy borrowers
  • sectoral capital requirement (SCR) – an additional capital buffer we can require banks to meet due to the build-up of credit in a specific sector (for example, lending to the dairy industry, residential mortgages or credit cards), which poses risks for the whole system. We can ease the requirement when sector-specific risks return to normal levels or enter a downturn
  • adjustments to the minimum core funding ratio (CFR) – a requirement that banks fund a certain proportion of their loans and advances with retail deposits, long-term wholesale funding or capital. We can ease the requirement in the event of market dislocation.

Borrower-based tools

Borrower-based transactional tools restrict the amount of credit that banks can lend to certain borrowers – for example, based on deposit size or income.

Loan-to-value ratio restrictions

Loan-to-value ratio (LVR) restrictions impose limits on the amount of credit that banks can extend to mortgage borrowers with high LVRs (low deposits). This lessens the potential for large mortgage losses in the event of a significant correction in the housing market.

LVR restrictions were implemented in October 2013, and revised over time.

Read more about LVR restrictions

Debt serviceability restrictions

Debt serviceability restrictions (DSRs) are restrictions we can impose to limit the amount of credit that banks can extend to borrowers relative to their income. These could include, but are not limited to:

  • Debt-to-income (DTI) ratio restrictions are a cap on mortgage debt (or total debt of a borrower including mortgage debt) as a multiple of income.

  • Debt-servicing-to-income (DSTI) ratio restrictions are a cap on the percentage of a borrower’s income that can be allocated to servicing debt payments.
  • Test rate floors set a floor on test interest rates used by banks in their serviceability assessments. The floor can be specified in absolute terms, or as a margin above commercial lending or another reference rate.

Debt serviceability restrictions, including DTI ratio limits, were added to the Reserve Bank’s Memorandum of Understanding (MoU) on macro-prudential policy with the Minister of Finance in August 2021.  In November 2021 we issued a consultation on the merits and potential design of DTI restrictions and a floor on test interest rates.

View our 2021 debt serviceability restrictions consultation

Following consideration of the submissions, we intend to proceed with designing a regulatory framework for operationalising DTI restrictions, in consultation with the industry and other stakeholders. We intend to have the framework in place by the end of 2022, so that restrictions could be introduced in mid-2023 if required.

Information from our previous 2017 consultation on this topic is also available here:

View our 2017 debt serviceability restrictions consultation

As well as the tools listed above, we may add other tools over time as the financial system and risks evolve. We will consult on any changes required to enable the operation of other macro-prudential instruments if deemed necessary.

How we implement macroprudential tools

We implement macroprudential tools via changes to the Banking Supervision Handbook and banks’ conditions of registration. This is in accordance with the macroprudential policy framework for New Zealand.

The framework describes how each macroprudential tool transmits to financial stability.

We first consulted on the macroprudential framework between March and May 2013. Documents relating to the original consultation are available in our archive library. These include a background paper, consultation paper, response to submissions and final policy position. We updated the macroprudential framework in 2019.

Notice periods

We give banks notice that we are going to apply a macroprudential tool via their conditions of registration. The following notice periods are indicative only.

Tool Notice period
Countercyclical capital buffers Up to 12 months
Sectoral capital requirements Up to 3 months
Adjustments to core funding ratio Up to 6 months
Adjustments to LVR restrictions At least 2 weeks