The central bank is reviewing bank capital adequacy requirements for home loans, and sees a higher correlation in the local market with housing loan losses than international standards assumed by the Basel II capital adequacy regime. The Reserve Bank is seeking submissions on a consultation document until April 16.
Mr Timms said while LVR looked the best option so far to subdue the housing market, the Reserve Bank needed to find a way to specifically target parts of the New Zealand market that had significant increases in house values.
Mr Timms had earlier called for regional LVR so that parts of New Zealand such as Dunedin and smaller regional centres were not unfairly affected by buyers having to find a higher deposit before buying a house.
''Statistics must be able to trace rises in house prices by region or suburbs. A nationally-high LVR will hurt New Zealand overall.''
Needing a 20% deposit was self-perpetuating in places like Auckland where house prices were going up. A higher deposit on another house could be paid without the buyer contributing any more cash because of the capital gain, he said.
The Reserve Bank's initial view was that the current method banks used to calculate their regulatory capital gave too much weight to risks associated with the individual circumstances of a borrower, and not enough to system risk from general economic conditions.
''The aim of the current review is to ensure that banks' baseline capital requirements for housing loans properly reflect risk in the housing sector, particularly in relation to loan to value ratios,'' deputy governor Grant Spencer said in a statement.
''The bank is proposing higher capital requirements for high LVR loans.''
However, loan-to-value ratios did not capture all forms of risk affecting housing loans, the bank said.
The consultation paper comes as the bank prepared to unveil a raft of new tools to promote financial stability, including the ability to set limits on the extent of high LVR lending. The central bank was expected to sign a memorandum with Finance Minister Bill English and the Treasury in the middle of the year, governing how it would use the tools.
The central bank had taken the view that the existing 15% correlation factor has become too low since Basel II was implemented in 2008. That has been compensated by the bank requiring extra margins on bank estimates for probability of default, and loss following a default.
''Our preliminary view that the estimates banks are using for other Basel parameters are not necessarily sufficiently conservative to compensate for a low correlation factor,'' the discussion document says.
In recent months, banks had been writing bigger mortgages as a ratio to the value of property. About 20% of the nation's $180 billion in residential mortgages are written at loan-to-value ratio of more than 80%, and 10% above 90%.
