Reserve Bank to get new financial stability tools by mid-2013, English says

Wednesday 27th February 2013

The Reserve Bank will get an expanded range of tools to shore up financial stability, including the ability to set loan-to-value ratios on residential mortgages and force banks to hold more capital against risky lending, by the middle of the year, Finance Minister Bill English says.

The Reserve Bank will consult on its proposals for the macro-prudential tools next month, and English expects to sign a memorandum of understanding on the tool-kit with governor Graeme Wheeler later this year, the finance minister said in a speech to the Auckland Chamber of Commerce today.

Proposals bandied about include forcing lenders to hold extra capital during credit booms, increasing capital in response to sector-specific risks, adjusting funding ratios to ensure more stable lines of cash, and to restrict high LVRs.

"In particular, we want to avoid a strong upswing in asset values and any unsustainable growth in borrowing well in excess of economic growth," English said. The tools "are not a replacement for interest rates as the principal tool of monetary policy, although the two policy frameworks will interact."

Wheeler has been under increasing pressure to introduce and use macro-prudential tools to take the heat of a bubbling Auckland property market and deliver looser monetary policy to take the steam out of the kiwi dollar, which recently traded at 82.57 US cents.

English today said there are expectations the tools will be used immediately to cool down the Auckland property market, but those decisions will stay with the Reserve Bank.

"The greatest influence on the housing market will remain interest rates and supply constraints created by the planning system," English said.

"Later this year, the government will have more to say about how the financial stability tools will work alongside policies on more flexible supply in the housing market and social housing reform," he said.

The speech comes as banks become more aggressive in trying to secure borrowers, with HSBC launching a three-year loan at 4.99 percent, the country's lowest rate at that term for at least a decade.

English also threw his weight behind the central bank's 'Open Bank Resolution' mechanism, which is designed to set out how much depositors and bond-holders will lose in the event of a bank falling over in order to avoid an

"unfair burden on taxpayers and a distortion of sound incentives to the financial system."

"The 'too big to fail' problem also represents a large contingent liability for taxpayers," he said. "We should do as much as we can to reduce these risks to the taxpayers, and hand more of the costs and incentives back to the financial system."

The upcoming budget in May will focus on building growth and investment to support more jobs and higher incomes, he said.

BusinessDesk.co.nz

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