Stricter Requirerments for High LVR Loans
New Zealand banks may be required to keep higher levels of capital on their balance sheets with new requirements set by the central bank. While this move is intended to protect against risky loans, some are worried this will only bring up interest rates and cause a crisis, which the increased capital requirements are trying to prevent.
In the statement released by the Reserve Bank of New Zealand this week, Deputy Governor Grant Spencer said “The aim of the current review is to ensure that banks’ baseline capital requirements for housing loans properly reflect risk in the housing sector, particularly in relation to Loan to Value Ratios (LVR). The Bank is proposing higher capital requirements for high LVR loans.”
Since mortgages with high LVR – some New Zealand loans are worth only 5 percent of the property – are more vulnerable to a recession, this statement is not particularly shocking. However, a Bloomberg article found that raising capital rates could potentially increase interest rates and make it more difficult to borrowers of these, and other loans, to make payments. Overall, it could keep the New Zealand housing market from recovering as quickly.
Other countries besides New Zealand – notably through Basel III requirements – have been increasing their capital reserves as well. But there are other ways beyond increasing reserves for banks and lenders to protect themselves against high LVR lending. With software, such as credit and risk management tools, financial institutions can lend to qualified borrowers, ensuring the bank’s continued profitability, as well as keeping interest rates low. By using these tools, central banks can avoid increasing capital requirements, which helps increase the number of loans that are able to be made and further assists their respective economies growth.