RBNZ Urges Banks to Follow Spirit of Low-Deposit Loan Rules

New Zealand’s central bank is urging bank boards and management to comply with any limits it may impose on home lending rather than promoting ways to get around the rules.

Management and directors “will be expected to follow the spirit, not just the letter of the restrictions,” Deputy Governor Grant Spencer said in a statement today. “In particular, they will need to ensure that the policy is not avoided or undermined through innovative lending practices.”

The Reserve Bank wants to curb home lending, particularly on deposits of less than 20 percent of the property value, because the banking system is increasing exposed to any collapse in house prices. Governor Graeme Wheeler is reluctant to raise interest rates to calm the housing market because that may stoke demand for the New Zealand dollar, hurting exports.

“LVR restrictions on residential mortgage lending can help to dampen excessive house price growth in periods when credit growth is boosting housing demand beyond housing supply,” Spencer said. “In so doing, they can reduce the risk of a rapid correction in house prices and the economic and financial instability that would ensue.”

The central bank hasn’t yet determined whether it will apply any limits, and reiterated today it will give at least two weeks advance notice before the restrictions take effect. It plans some technical changes to how the restrictions on high loan-to-value lending will apply, Spencer said in the statement.

New Zealand home prices rose 8.1 percent from a year earlier in July, the most since 2008, according to Quotable Value New Zealand, a government-owned property research company.

Bank Requirements

Banks who lend more than NZ$100 million ($80 million) a month will initially be required to meet the restriction, measured as an average rate over a six-month window rather than three months, he said. Thereafter, a three-month window will apply. Smaller banks will keep the six-month window.

In their submissions, banks raised the risk that third-party lenders and other devices would be used to get around the limits. The Reserve Bank would look at the extent any registered bank used such arrangements and would also be concerned about prominent marketing of such products, it said in a separate response to the submissions, on its website.

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