NZ central bank says current mortgage curbs appropriate, risks remain elevated

WELLINGTON (Reuters) - New Zealand’s central bank said on Wednesday that the country’s financial system is resilient but that risks remained elevated, adding that current mortgage restrictions are appropriate for now.

FILE PHOTO: Pedestrians walk past as a security guard stands in the main entrance to the Reserve Bank of New Zealand located in central Wellington, New Zealand, July 3, 2017. REUTERS/David Gray

The Reserve Bank of New Zealand (RBNZ) said in its half-yearly financial stability review that household risks have not changed much over the past six months.

The bank reduced loan-to-value ratio (LVR) restrictions at its last review in January as housing related risks waned but signaled plans to ramp up banks’ capital requirements to address longer-term vulnerabilities.

“The current LVR settings remain appropriate for now, with any further easing subject to continuing subdued growth in credit and house prices and banks maintaining prudent lending standards,” Governor Adrian Orr said in the bank’s half-yearly financial stability review.

Orr said current LVR settings have been successful in reducing some of the risks associated with high household indebtedness.

The bank struck a dovish tone earlier this month as it cut benchmark interest rate for the first time in two-and-a-half years, citing global and domestic risks to growth.

“The New Zealand financial system remains resilient to a broad range of economic risks. However, financial system risks remain elevated, and ongoing effort is necessary to bolster system soundness and efficiency,” Orr said in the statement.

The bank warned that domestic debt levels are high in the household and dairy sectors, leaving borrowers and lenders exposed.

RBNZ announced last year that it was considering raising capital ratio requirements for banks to reduce risks to the financial system in the event of any major shock.

The bank is presently reviewing public submissions on the proposal.

“We are open-minded...if we see sufficient reason to change any of the parameters we will,” Orr said at a press conference when asked about concerns raised by banks about the capital requirements.

Orr said in the financial stability report that some insurers and non-bank deposit takers also need to improve their capital buffers.

“We will be reviewing insurer solvency standards in the months ahead,” he said in the report.

Reporting by Charlotte Greenfield and Praveen Menon; editing by Sonya Hepinstall and Sam Holmes