LVR restrictions promote financial stability

22 May 2019

LVR restrictions promote financial stability, evaluation finds

The Reserve Bank has undertaken a detailed evaluation of Loan-to-Value Ratio restrictions (LVR) as part of a wider review of macroprudential policy.

“By improving the resilience of both households and banks, LVR policy has played a useful role in promoting financial stability during a period of heightened housing market risks,” Deputy Governor and Head of Financial Stability Geoff Bascand said.

The evaluation covers the impact of LVRs on financial stability, efficiency and other public policy objectives such as competition and housing affordability.

Along with the evaluation of LVR policy, the Reserve Bank today published other papers that explain the role of macroprudential policy, how the policy is conducted, and its effectiveness at enhancing financial stability. Macroprudential policy aims to limit the adverse impact of boom-bust cycles in the financial system and is one of several ways the Reserve Bank helps to maintain financial stability.

“This work is timely. Macroprudential was established as a new policy function in 2013, and based on the experience of the past five years we’ve updated our strategy for using the tools,” Mr Bascand said.

“Macroprudential policy is not about eliminating risks for banks and households, reducing house prices, or managing the business cycle. Affordability pressures on the housing market and the rental market require a much broader policy response,” Mr Bascand said.

He said that other macroprudential policy measures could also be used to build additional capital and liquidity buffers in the banking system, so that banks could support the economy under stress. The Reserve Bank has recently consulted on a more prominent role for a macroprudential tool called a counter-cyclical buffer.

Phase 2 of review of the Reserve Bank Act will include consultation on options for the future macroprudential framework. The Reserve Bank’s evaluation of macroprudential policy and LVRs has been completed to assist this review. Mr Bascand said the Reserve Bank believes that it should retain the ability to use macroprudential policies, supported by clear and transparent communication of how they can be used.

More information

• Review of the Reserve Bank’s loan-to-value ratio policy

• Macroprudential policy framework: Mitigating boom-bust cycles in the financial system

• Analytical Note: Have the LVR restrictions improved the resilience of the banking system?

• Macroprudential webpage

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