Thursday 23rd November 2017
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The proposed inclusion of a debt-to-income ratio tool in the Reserve Bank's toolkit was largely met with criticism in a series of submissions, with ANZ Bank New Zealand saying it is fundamentally flawed and Cooperative Bank calling it a blunt, unproven instrument.
The central bank initially sought to include serviceability restrictions or a DTI tool as part of a macroprudential toolkit that includes restrictions on high loan-to-value ratio lending aimed at curbing an overheated housing market. The loan-to-value restrictions on mortgage lending, however, have taken the heat out and while the Reserve Bank said it would not implement a DTI policy in current market conditions, it considers it could be a useful option in the future. Therefore, it sought feedback about risks posed by high-DTI lending and the potential for a DTI limit or similar policy to mitigate the risks. Consultation closed on Aug. 18.
ANZ said New Zealand banks already have internal frameworks to adequately assess affordability and respond to market conditions. ANZ "believes the LVR restrictions have achieved their purpose in cooling the housing market," it said in its submission.
"ANZ believes that a macroprudential tool based on total debt to total gross income as proposed by RBNZ is fundamentally flawed, as it is not a measure of affordability," the country's biggest lender said.
The bank said the DTI tool is "unsophisticated" as it does not take into account things such as after-tax income, household costs, other outgoing and the interest rate environment. ANZ also said the restrictions could have unintended consequences that could stifle competition between banks and drive borrowers to the non-bank sector and could lead people to hide or obscure debt, among other things.
Hong Kong and Shanghai Banking Corporation said while DTIs may be useful as an indicative tool it shouldn't be mandatory or decisive when making a lending decision. Among other things, the lender said there could also be an increase in the use of second mortgages and/or peer-to-peer or non-bank/shadow banking lending that may or may not be disclosed by the customer on application, it said. In the event a DTI limit is introduced, it suggests a two-tier approach with a higher limit for larger cities that command higher house prices.
The New Zealand Bankers Asociation said that central bank's consultation paper does not establish the benefits of the debt to income ratio outweigh its costs and called for more analysis while Cooperative Bank called it a "blunt instrument" that is unproven in its ability to effectively manage financial stability.
ASB Bank said it is less clear how the contemplated DTI restrictions "will provide protection from a known risk and therefore provide for increased resilience of the domestic financial system." It underscored that it does not think the DTI in isolation is a good determinant of affordability "and therefore implementing restrictions is very unlikely to protect against borrower default risk of rising interest rates or unemployment." ASB said "we would never consider assessing a customer's ability to service a loan based on DTI alone."
For its part, Bank of New Zealand said there should be a segmented approach to the deployment of the tool should it be used. Overlaying DTI restrictions on top of LVR restrictions without any segmentation has the potential to significantly impact certain sectors of the home lending market which might otherwise be able to reasonably afford the lending, it said pointing to some first home buyers at the start of their careers with the capacity to manage discretionary spending and with reasonable expectations of increases in income as their careers progress.
Among other things, BNZ said extensive consultation with industry and other stakeholders will be required to design a tool that is effective and that does not create significant unintended consequences.
Kiwibank, meanwhile, said additional tools should be developed, but "we are not convinced the DTI tool, as it is proposed and acting on its own, would be the best way to achieve this objective without adding risk to the overall market by creating distortions and potentially inequitable outcomes."
The Reserve Bank's response to the submissions accepted that DTI is "not a perfect indicator of risk" and said that if the memorandum of understanding is amended to incorporate serviceability restrictions, the central bank considered that this should be written in such a way as to admit a range of possible formulations.
It expects to discuss the results of this consultation with the minister of finance in due course. The Reserve Bank will also be discussing the terms of reference for the 2018 review of the memorandum of understanding with the minister and with the Treasury, it said.
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