RBNZ decides not to ease LVR restrictions

The Reserve Bank has decided not to ease loan-to-value ratio restrictions as many had expected because very low interest rates could fuel excessive risk-taking. The regulator has also warned insurers to improve their capital reserves and noted a spike in overdue dairy loans. Bernard Hickey reports.

Governor Adrian Orr has warned in the regulator's half-yearly report on financial stability that prolonged low interest rates can promote excessive risk-taking and debt and overheat asset prices. So he has decided not to ease loan to value ratio restrictions as expected.

Financial system vulnerabilities remain elevated and more effort is required to ensure that the system remains resilient over the longer-term, Reserve Bank Governor Adrian Orr says in releasing the November Financial Stability Report.

"While necessary to maintain near-term inflation and employment objectives, prolonged low interest rates can promote excess debt and investment risk-taking, and overheat asset prices," Orr said in the news release published with the Financial Stability Report.

He said the LVR restrictions had been successful in reducing the more excessive household mortgage lending, which had improved the resilience of banks to a significant deterioration in economic conditions.

"But, 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 restrictions at current levels at this point in time."

Later in the full report, the bank said it would be watching how the risks evolved around the LVR restrictions "in coming months."

It also noted it had seen early signs "that housing lending risk may be increasing again."

"There are also early signs that banks are easing mortgage lending standards in response to the low interest rate environment. Given the uncertainty around the future trend in housing lending risk, it would not be appropriate to ease LVR restrictions further at this point," it wrote.

Later it noted an easing of lending restrictions by APRA in Australia was also having an effect here.

"This has contributed to a loosening of bank lending standards in NewZealand in the past few months, which has the potential to increase the supply of credit to the housing market," the Reserve Bank here said.

More intensive scrutiny

Elsewhere, Deputy Governor Geoff Bascand said the regulator would be taking a more intensive approach to regulating banks and insurers, which would involve greater scrutiny of compliance.

Bascand said some life insurers had low solvency buffers over minimum requirements, with recent falls in long-term interest rates putting further pressure on solvency ratios for some of these insurers.

"Affected insurers are preparing plans to increase solvency ratios and are subject to enhanced supervisory engagement," Bascand said.

"This highlights the need for insurers to maintain strong buffers, and insurer solvency requirements will be reviewed alongside an upcoming review of the Insurance (Prudential Supervision) Act,” he said.

Low interest rates hitting insurer solvency

Later in the FSR, the bank highlighted that New Zealand insurers had the lowest solvency ratios in the world and that low interest rates could make that worse.

"The Bank has sought information from 22 life insurers on their sensitivity to interest rate movements, and detail on how they are managing the risks," it said in the FSR

"Initial analysis shows material impacts on the solvency positions of some New Zealand life insurers. The Reserve Bank is actively discussing the impacts with the most affected insurers and has requested that they prepare plans to mitigate and manage the impacts," it said.

"The current difficulties highlight the potential need for stronger solvency standards to be incorporated within the supervisory framework."

Later in the document, it noted: "Almost all general insurers are meeting the Reserve Bank’s solvency requirements."

It did not identify which ones were not.

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