Bollard wants more regulation of bank lending

The Reserve Bank in releasing its Financial Stability Report warned of “significant economic imbalances which present risks for the financial system,” being the ongoing housing boom.

Bollard says it is being funded by international borrowing via the domestic banking system, and if  global markets become less liquid, there could be “a sharp correction”.

He says banks’ low lending margins have contributed to “ever increasing levels of household debt and upward pressure on house prices”.

“This financial stability risk raises the question of whether a regulatory response is needed.”

New international “Basel II” capital adequacy rules – increasing the cash reserves banks are required to hold to back loans in excess of 80% of the value of the property – are due for introduction in just over six months anyway. But Bollard thinks changes to the current framework “in this direction” may be required sooner.

Bollard concluded that the best contribution to continued financial stability would be a moderation and gradual adjustment in the housing market. “The banks should be mindful of this and be careful not to exacerbate the risks inherent in already-stretched household balance sheets.”