New measures to address financial stability confirmed

The Reserve Bank has been given the go-ahead to implement extra measures which could affect future home buyers by requiring greater deposits before loans are approved.

The housing bubbles in both Auckland and Christchurch are set to continue and the central bank has been warning it needs the ability to make banks require home buyers to have up to at least a 20% deposit, from the current 5% to 10%.

Finance Minister Bill English said in Budget 2013 the measures he had agreed with Reserve Bank governor Graeme Wheeler were aimed at further protecting the economy and financial system from boom and bust cycles.

''Excessive credit growth, followed by a bust, was at the core of the global financial crisis. While New Zealand's banking system avoided the upheaval that engulfed some other countries, the Government has agreed that the Reserve Bank should have extra measures available to reduce New Zealand's vulnerability to such cycles.''

Banks would be required to:
• Hold additional capital on their balance sheets as a buffer during an economy-wide credit boom
• Hold additional capital against loans in specific sectors if risks emerge in those sectors
• Adjust their funding ratios to use more stable sources of funding to avoid short-term funding shortages
• Apply quantitative restrictions on the share of high loan-to-value ratio loans in the housing sector.

However, while the tools might help to support monetary policy, the official cash rate would remain the primary monetary policy instrument, Mr English said.

 

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