It believes more effort is required to ensure that the system remains resilient over the long term
The Reserve Bank of New Zealand (RBNZ) has decided to keep the loan-to-value (LVR) at its current level to “bolster financial system resilience.”
RBNZ Governor Adrian Orr noted that financial system vulnerabilities remain elevated, so more effort is required to ensure the system’s resilience over the long term – including keeping LVR at its current level.
“The Reserve Bank’s [LVR] restrictions have been successful in reducing the more excessive household mortgage lending, thereby improving the resilience of banks to a significant deterioration in economic conditions,” Orr said. “But, there remains the risk that prolonged low interest rates could lead to resurgence in higher-risk lending. As such, we have decided to leave the LVR restrictions at current levels at this point in time.”
“Strong bank capital buffers are key to enabling banks to absorb losses and continue operating when faced with unexpected developments. The Reserve Bank has proposed increasing these buffers further with final decisions on the Capital Review proposals to be announced on 5 December.”
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Meanwhile, Deputy Governor Geoff Bascand emphasised the importance of good governance and robust risk management processes in financial institutions to maintain long-term resilience.
“Our recent reviews of banks and life insurers, and the number of recent breaches in key regulatory requirements, reinforce the need for financial institutions to improve their behaviour,” he said. “We are engaging with industry to ensure that they strengthen their own assurance processes and controls. We have also reviewed our own supervisory strategy and will be taking a more intensive approach, which will involve greater scrutiny of institutions’ compliance.”
“Some life insurers have low solvency buffers over minimum requirements. Recent falls in long-term interest rates are putting further pressure on solvency ratios for some of these insurers. Affected insurers are preparing plans to increase solvency ratios and are subject to enhanced supervisory engagement. This highlights the need for insurers to maintain strong buffers, and insurer solvency requirements will be reviewed alongside an upcoming review of the Insurance (Prudential Supervision) Act.”
