Non-banks may be subject to LVRs

by 10 Jul 2019

The Reserve Bank has indicated that it may consider imposing loan-to-value restrictions (LVRs) on non-banks as part of the second phase of its Reserve Bank Act Review.

The Reserve Bank has published its second consultation document on the future of the Reserve Bank Act, and is seeking feedback on its role in overseeing New Zealand’s financial sector. This may result in potential changes to its tools, powers and approach to prudential regulation; as part of these changes, the Reserve Bank has stated that it may apply LVRs to non-bank deposit takers later down the line, in order to close some of the gap in regulation between them and the mainstream banks.

“Prior to the Global Financial Crisis (GFC), insurers and non-bank lenders were largely unregulated, or very lightly regulated,” the Reserve Bank stated in its document.

“As a result there are notable differences between the designs of the prudential and conduct regulatory systems.”

The Reserve Bank said that the current LVR restrictions imposed on main banks could be “undermined” if non-banks were willing to provide loans outside of the parameters of these restrictions.

The Reserve Bank’s power to apply LVRs is currently contained in the powers to regulate banks in the Reserve Bank Act,” it stated.

“While lending standards could continue to be empowered alongside other prudential controls over banks (and other deposit-takers), an alternative could be to make lending standards applicable to all relevant lenders (even if they do not take deposits).

“This could be desirable, because lending restrictions can potentially be undermined if non-deposit taking lenders are willing to offer the loans that the Reserve Bank has restricted.”

The Reserve Bank highlighted that other countries apply their lending restrictions to all lenders by default, without differentiating between banks and non-banks, however say that the move would be a “significant change” for New Zealand.

The Reserve Bank has invited submissions on the topic presented in its paper. The deadline for submissions is 5pm on 16 August 2019.

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