Following the Global Financial Crisis, there was considerable international focus on reducing risks to the financial system. This led to the development of a policy approach known as macro-prudential policy (PDF 272KB), which uses prudential instruments to manage the system-wide (systemic) risks that can develop during boom-bust financial cycles. Macro-prudential policy aims to promote greater financial system stability by:
- building additional resilience in the financial system during periods of rapid credit growth and rising leverage or abundant liquidity; and
- dampening excessive growth in credit and asset prices.
This short video – Booms, busts and the way between – explains the role of macro-prudential policy and the tools the Reserve Bank has to smooth out boom-bust cycles.
See Macro-prudential policy – FAQs for responses to frequently asked questions about macro-prudential policy.
Memorandum of Understanding on Macro-Prudential Policy
In May 2013, the Minister of Finance, Hon Bill English, and Reserve Bank Governor, Graeme Wheeler, signed a Memorandum of Understanding (MOU) on Macro-Prudential Policy. The MOU outlines the governance arrangements for the use of macro-prudential tools that are designed to promote greater financial system stability. The MOU sets out four macro-prudential tools in the New Zealand context:
- the countercyclical capital buffer (CCB)
- adjustments to the minimum core funding ratio (CFR)
- sectoral capital requirements (SCR)
- temporary restrictions on high loan-to-value ratio (LVR) residential mortgage lending.
High loan-to-value ratio restrictions
Temporary limits on high loan-to-value ratio (LVR) residential mortgage lending were put in place in October 2013. High-LVR lending restrictions were changed on 1 November 2015, and vary depending on where the mortgaged property is located and who lives in it.
LVR lending restrictions are tighter for loans secured by Auckland investment property. This tightening is in response to the growing housing market risks in the region. In contrast, LVR restrictions on bank lending secured only by property outside Auckland have been eased compared to initial restrictions.
More information is available on the Loan-to-value ratio restrictions page.