Reserve Bank will explain before using new asset bubble tools

There will be consultation with banks in coming weeks on adding details of the policy into its Banking Supervision Handbook.

The Reserve Bank will clearly explain concerns it has about risks to financial stability before using any of its new tools to cool asset bubbles in the hope that may prevent their use.

The central bank today released its response to submissions and its final policy position after public consultation in March and April on its new macro-prudential policy.

The measures include requiring lenders to hold more capital on their balance sheets against certain assets and restricting the level of low-equity home loans.

"Prior to macro-prudential policy adjustments, it is expected that the Reserve Bank will clearly communicate its concerns around the emerging risks to financial stability," the bank says.

"Explaining and discussing these risks to banks and the public will be important, as in some cases this may help to change behaviour without recourse to additional prudential measures."

The consultation has not resulted in major changes to the framework, deputy governor Grant Spencer says in a statement.

The Reserve Bank will consult with banks in coming weeks on adding details of the policy into its Banking Supervision Handbook, which would allow the measures to be used in the future.

The four new tools are adjustments to banks' core funding ratio, required capital buffers during excessive credit growth, capital requirements for specific assets, and restrictions on high loan-to-value ratio mortgage loans.

On May 3, Westpac's New Zealand operation said it was pulling back on lending on a loan-to-value ratio of 80 percent.

"Increasing house prices, particular in Auckland and Christchurch, were not something we were comfortable with," chief executive Peter Clare told BusinessDesk at the time.

LVRs are the RBNZ's first line of attack in the event it is concerned by house price bubbles.

(BusinessDesk)

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