Reserve Bank seeks feedback on raising capital requirements for home lending

Tuesday 26th March 2013

The Reserve Bank is testing the waters for making lenders carry more capital cover on their balance sheets for high loan-to-value ratio mortgages, where it sees more risk to the country's financial system.

The central bank is reviewing bank capital adequacy requirements for home loans, and sees a higher correlation in the local market with housing loan losses than international standards assumed by the Basel II capital adequacy regime. The Reserve Bank is seeking submissions on a consultation document until April 16.

Its initial view is that the current method banks use to calculate their regulatory capital gives too much weight to risks associated with the individual circumstances of a borrower, and not enough to system risk from general economic conditions.

"The aim of the current review is to ensure that banks' baseline capital requirements for housing loans properly reflect risk in the housing sector, particularly in relation to loan to value ratios," deputy governor Grant Spencer said in a statement. "The bank is proposing higher capital requirements for high LVR loans."

The consultation paper comes as the bank prepares to unveil a raft of new tools to promote financial stability, including the ability to set limits on the extent of high LVR lending. The central bank is expected to sign a memorandum with Finance Minister Bill English and the Treasury in the middle of the year governing how it would use the tools.

The central bank has taken the view that the existing 15 percent correlation factor has become too low since Basel II was implemented in 2008. That has been compensated by the bank requiring extra margin on bank estimates for probability of default, and loss given default.

"Our preliminary view that the estimates banks are using for other Basel parameters are not necessarily sufficiently conservative to compensate for a low correlation factor," the discussion document says.

In recent months, banks have been writing bigger mortgages as a ratio to the value of property. About 20 percent of the nation's $180 billion in residential mortgages are written at loan-to-value ratio of more than 80 percent, and 10 percent above 90 percent.

BusinessDesk.co.nz

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