LVR rules could be permanent

Monday 1 July 2019

LVR restrictions on mortgage lending could be a "permanent setting", according to Reserve Bank deputy governor Geoff Bascand.

By Dan Dunkley

The central bank faces a choice of keeping LVR restrictions as they are, removing them, maintaining a "permissive setting", or making the rule permanent, Bascand told conference delegates on Sunday.

Bascand said making LVR permanent was "an important policy question for future research", as he briefed the University of Otago Foreign Policy School in Dunedin.

The deputy governor said a permanent LVR setting could "continue to guard against the very risky forms of lending, and may better prepare the banking system to adapt to a more restrictive calibration if risks re-emerge".

On the other hand, Bascand said abolishing LVR could happen "alongside the deployment of a less intrusive tool if we are still worried about residual risks".

He said he was "comfortable" with easing LVR in the future, but this was "predicated on risks continuing to abate".

He said LVR could be eased if household debt and house price growth remained stable, and if lending remained "prudent".

Bascand added the Reserve Bank's new capital rules could reduce risk in the financial system and allow it to use LVR restrictions "less actively".

He re-affirmed the central bank's view that LVR restrictions have been a success.

"Our analysis showed that as a result of introducing the LVR policy, resilience of the banking system has increased.

"And while it’s more difficult to pinpoint, we also found that the policy has had a significant benefit in mitigating the risk to the economy from financial cycles," Bascand said.

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