NZ Bankers’ Association critical of RBNZ proposal
(28 March 2013 – New Zealand) The New Zealand Bankers’ Association (NZBA) is critical of proposals by the Reserve Bank of New Zealand (RBNZ) to increase the amount of capital banks have to hold against home loans with a high loan-to-value ratio (LVR).
The proposal, released on Wednesday by the RBNZ, aims to get the baseline right before the adopting new 'macro-economic' regulatory tools which would allow it to raise and lower over the course of an economic cycle the amount of capital banks need to hold.
The RBNZ believes borrowers with high LVR loans are more vulnerable to an economic downturn and that the losses on such loans are more highly correlated than other loans, that is, if some such loans are in default it is more likely that others will be.
'If economic conditions change for the worse, and in view of the current state of the housing market, there is a risk that borrowers most exposed to adverse changes in general economic conditions could all come under pressure at the same time, with a corresponding impact on the quality of banks' housing loan portfolios,' the RBNZ said.
It has analysed data on banks' loss rates between 2008 and 2012 - a period which it says included a 'mild' downturn.
It found that loss rates on high LVR loans generally increased more, in some cases substantially more, than loss rates on lower LVR loans.
But NZBA Chief Executive Kirk Hope said the banks would like to see much more evidence than that sweeping observation to back up the Reserve Bank's conviction that high LVR borrowers are at greater systemic risk, as opposed to those risks particular to the borrower which will have been taken into account when the loan was made.
Hope said that it was wrong to assume all high LVR borrowers were on comparatively low incomes; it might reflect a relatively high income and capacity to service the loan.
He is critical of the short period the banks have been given to run their own models and prepare a response to the Reserve Bank proposals - three weeks, including the Easter break.
The RBNZ believes borrowers with high LVR loans are more vulnerable to an economic downturn and that the losses on such loans are more highly correlated than other loans, that is, if some such loans are in default it is more likely that others will be.
'If economic conditions change for the worse, and in view of the current state of the housing market, there is a risk that borrowers most exposed to adverse changes in general economic conditions could all come under pressure at the same time, with a corresponding impact on the quality of banks' housing loan portfolios,' the RBNZ said.
It has analysed data on banks' loss rates between 2008 and 2012 - a period which it says included a 'mild' downturn.
It found that loss rates on high LVR loans generally increased more, in some cases substantially more, than loss rates on lower LVR loans.
But NZBA Chief Executive Kirk Hope said the banks would like to see much more evidence than that sweeping observation to back up the Reserve Bank's conviction that high LVR borrowers are at greater systemic risk, as opposed to those risks particular to the borrower which will have been taken into account when the loan was made.
Hope said that it was wrong to assume all high LVR borrowers were on comparatively low incomes; it might reflect a relatively high income and capacity to service the loan.
He is critical of the short period the banks have been given to run their own models and prepare a response to the Reserve Bank proposals - three weeks, including the Easter break.
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