© The Treasury

Macroprudential policy in New Zealand

James Beard

Economic Counsellor, NZ Delegation to the OECD

© The Treasury2

Motivation

• Pre-crisis, inflation within target band and strong growth. But:– Strong house prices/credit created financial stability

risks– Capital inflows and apparent exchange rate overshoot

• In hindsight macro-prudential policy (MPP) would have helped to build buffers in financial system– Likely to have supported monetary policy ‘at margin’

• MPP framework introduced in 2013.

© The Treasury3

Framework

• Objective:...to increase the resilience of the domestic financial system and counter instability in the domestic financial system arising from credit, asset price or liquidity shocks.

• Governance:– MOU between Minister of Finance (MOF) and Governor of the

RBNZ.– RBNZ sole decision maker, as required by RBNZ Act.– Must consult with MOF and Treasury before implementing.– RBNZ Must release a policy assessment twice a year in its

financial stability report– Review after 5 years.

© The Treasury4

Four macro-prudential tools

System-widetools

Variable core funding ratio

Greater use of stable funding e.g. deposits, long-term wholesale funding

Counter-cyclical capital buffer

Extra capital required against total lending book

Targeted tools Sectoral capital requirements

Extra capital required against lending to sector(s) with rising risk e.g. housing, commercial property, agriculture

Housing loan-to-value restrictions

Option 1 - outright caps

Option 2 - speed limits

© The Treasury5

MPP in operation: ‘LVR Speed Limits’

• Framework utilised in October 2013 due to concern over house price inflation.

• LVR ‘Speed limits’ introduced.• Banks required to reduced high-LVR

lending to <10% of new lending.• Contrasts with usual approach of outright

bans with exemptions.• Explicitly expected to be temporary.

© The Treasury6

House price inflation

© The Treasury7

LVR speed limits

• Reasons:– House prices rising from already stretched levels –

increasing risk of future sharp decline.– Housing shock would put pressure on bank balance

sheets.– LVRs can help to restrain the demand for housing

while supply gradually catches up.

• Directly tightening credit availability through LVR limits seen as most effective instrument

© The Treasury8

Impacts: High LVR lending restricted since Oct 2013

High-LVR residential mortgage lending(percent of gross mortgage lending)

0

5

10

15

20

25

30

35

40

0

5

10

15

20

25

30

35

40

Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14

% %

LVR speed limit

© The Treasury9

Impacts: Reduced growth in mortgages

0

1

2

3

4

5

6

0

1

2

3

4

5

6

2009 2010 2011 2012 2013 2014

$bn LVR restrictions introduced

Housing new loan approvals

New commitments

Total housing credit growth(quarterly)

$bn

Credit growth($billion, monthly)

© The Treasury10

Impacts: First home buyers more affected

Sales by purchaser segment(BNZ-REINZ survey)

58%65%

19%

19%

24%16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Q1 2013 Q1 2014

%

First Home BuyersInvestorsOther

© The Treasury11

Impacts: House sales down since Sept 2013

Monthly house sales (seasonally adjusted)

3,500

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

3,500

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Number LVR restrictions introduced

Number

© The Treasury12

Impacts: Prices - what could have been...

Source: Price, G. (2014), How has the LVR restriction affected the housing market: a counterfactual analysis, RBNZ Analytical Note AN2014/13, RBNZ, Wellington.

© The Treasury13

Conditions for removal

1. Once the housing market moderates.

2. Provided there is no incipient resurgence.

3. Earliest removal to start late 2014.

© The Treasury14

Some useful references

• Memorandum of Understanding:– http://www.rbnz.govt.nz/financial_stability/macro-prudential_policy/5266657.html

• Consultation and Final Policy Position documents– http://www.rbnz.govt.nz/financial.../macro-prudential_policy/5166933.pdf– http://www.rbnz.govt.nz/financial_stability/macro-prudential_policy/5270425.pdf

• Bulletin article on MPP framework:– http://rbnz.govt.nz/research_and_publications/reserve_bank_bulletin/2013/2013sep76_3rog

ers.pdf

• Regulatory Impact Statement on LVR’s:– http://rbnz.govt.nz/financial_stability/macro-prudential_policy/5407434.pdf

• Analytical note: Estimating the impact of restrictions on high-LVR lending– http://rbnz.govt.nz/research_and_publications/analytical_notes/2013/an2013_05.pdf

• Analytical note: How has the LVR restriction affected the housing market: a counterfactual analysis– http://www.rbnz.govt.nz/research_and_publications/analytical_notes/2014/an2014_03.pdf