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RBNZ maintains LVR mortgage restrictions

The Reserve Bank has dashed hopes that it would ease mortgage lending restrictions and instead highlighted risks to the financial system from overseas and low interest rates.

The central bank's latest financial stability report, which looks at the health of the financial system, said risks to the system remained elevated and more needed to be done to strengthen it.

RBNZ Governor Adrian Orr said international risks had increased, and the move to cut interest rates to support the New Zealand economy, as well as overseas, had increased other dangers such as excess debt, investment risk-taking, and overheated asset prices.

"There remains the risk that prolonged low interest rates could lead to a resurgence in higher-risk lending. As such, we have decided to leave the LVR (loan to value ratios) restrictions at current levels at this point in time," he said.

Retail banks are limited to having no more than 20 percent of their home loans to owner occupiers with a less than 20 percent deposit, and no more than 5 pct of their lending to property investors with less than a 30 pct deposit.

Orr said the restrictions had done their job in reducing excessive mortgage lending, and that had allowed borrowers to repay loans quicker.

However, he noted that changes to lending rules in Australia had resulted in the big four banks in New Zealand, all of which are Australian owned, loosening their lending standards which might increase the supply of credit here.

The report also highlighted the need for banks and insurance companies to improve their behaviour and strengthen their finances.

Deputy RBNZ Governor, Geoff Bascand, who is in charge of banking and insurance company supervision, said the lower interest rates were putting further pressure on the finances of life insurance companies, which are required to have minimum solvency levels to cover the cost of claims.

"This highlights the need for insurers to maintain strong buffers, and insurer solvency requirements will be reviewed ... we have also reviewed our own supervisory strategy and will be taking a more intensive approach, which will involve greater scrutiny of institutions' compliance," he said.

The report reiterated its long-standing concerns about debt in the dairy industry, in particular a relatively small number of highly indebted farms which account for just under a third of total sector debt.

It said higher dairy prices had improved the finances of borrowers and banks had been stricter in lending, but it noted that some banks were trying to improve their profit margins by charging fees and other moves.

"This means that the most financially vulnerable farms are unlikely to see significant relief in their financing costs," the report said.

Among the international risks raised in the report the RBNZ singled out global trade tensions, China's financial system and Australia's housing market.

This article was originally published on RNZ and re-published with permission.

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