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RBNZ says banking system risks have eased, loosens LVRs

As widely expected, the Reserve Bank has further eased its loan-to-valuation restrictions on banks’ mortgage lending and the central bank said the risks to the country's financial system have eased in the last six months.

In its latest financial stability report, the central bank said that “both mortgage credit growth and house price inflation have eased to more sustainable rates, reducing the riskiness of banks’ new housing lending.”

Nevertheless, it said vulnerabilities persist and households in particular remain exposed to financial shocks due to their large mortgage debt burden.

The Reserve Bank said debt in the agricultural sector, particularly for dairy farms, remains high “implying ongoing financial vulnerability.”

Agricultural balance sheets need to be strengthened, it said.

In the medium term, the agricultural industry needs to respond to a variety of climate change-related challenges and that will likely require investment.

Domestic risks have eased but global financial vulnerability has increased, the central bank said.

“Significant build-ups in debt and asset prices, and ongoing geopolitical tensions, overhang financial markets,” it said.

“This vulnerability is highlighted by the current elevated price volatility in equity and debt markets.”

New Zealand’s exposure to global risks has reduced because New Zealand banks have become less reliant on short-term and foreign funding, the Reserve Bank said.

“The domestic banking system remains sound at present. We are using this period of relative calm to reassess whether the banking system has sufficient capital to weather future extreme shocks,” it said.

“Our preliminary view is that higher capital requirements are necessary so that the banking system can be sufficiently resilient whilst remaining efficient.”

The central bank said it will release a final consultation paper on bank capital requirements in December.

It noted bank profitability reflects their low operating costs and strong asset performance but says those low costs have been achieved partly through underinvestment in core IT infrastructure and risk management systems.

The Reserve Bank and the Financial Markets Authority will be reviewing bank responses to their recent joint inquiry on bank conduct and culture in March next year and following up as required.

The central bank noted the full liquidation of CBL Insurance on Nov. 12 but said aside from that company, the insurance sector as a whole is meeting its minimum capital requirements.

“However, capital strength has declined and a number of insurers are operating with small buffers. The insurance industry must ensure it has sufficient capital to maintain solvency in all business conditions,” the Reserve Bank said.

It said its review of the insurance industry’s conduct and culture, also in conjunction with the FMA, will be released in January 2019.

The LVRs to be eased from Jan. 1 will allow banks lend up to 20 percent of their new mortgage lending to borrowers putting down less than a fifth as a deposit, up from 15 percent currently.

As well, the deposits investors must have has been eased to 30 percent of a property’s value, down from 35 percent previously.

Although banks are allowed to lend up to 5 percent of total new lending to investors with smaller deposits, that level is so low as to effectively bar such lending.

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