Tail risks rise. LVRs stay put. Conduct in focus.
• The RBNZ’s latest FSR: NZ’s financial system is sound and “remains resilient to a broad range of economic risks”.
• The RBNZ chose not to relax LVR settings, citing rising tail risks from housing as interest rates hit lows. RBNZ uncomfortable with lending behaviour.
• There will be increased scrutiny of the banks, and insurers. And the RBNZ is bolstering its capacity.
• We now await the RBNZ final decision on bank capital requirements, due out next Thursday.
Once again, the RBNZ finds NZ’s financial system sound and “resilient to a broad range of economic risks”. With the RBNZ’s Bank Capital Review being the most hotly anticipated release this side of Christmas (due out next Thursday), today’s Financial Stability Report (FSR) didn’t garner much attention, especially with the LVR’s left unchanged. The RBNZ decided not to relax the Loan-to-Value Ratio (LVR) restrictions. The housing market has shown signs of recovery, and the RBNZ is concerned that record low mortgage rates may increase financial stability risks surrounding housing-related lending.
The key vulnerabilities that keep the RBNZ up at night, haven’t changed. New Zealand has high levels of household and dairy sector indebtedness and is vulnerable (always) to global financial market shocks and a slowdown in global trade. Since May, domestic vulnerabilities have moderated slightly. For instance, export commodity prices are high and are supporting agriculture profitability. However, global risks have intensified. NZ’s trading partner growth forecasts have been revised lower, and the low global interest rate environment has increased vulnerabilities of financial markets via growing debt.
As to be expected ahead of the major announcement next week, the RBNZ refused to discuss the upcoming bank capital review.
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