The Reserve Bank is now able to bring in tougher rules for banks to avoid a boom and bust in the housing market, with Finance Minister Bill English singling out the hot Auckland market and the risk of the bubble bursting. English announced that he had signed a memorandum of understanding with Reserve Bank governor Graeme Wheeler on possible moves to control bank lending, if needed. The Reserve Bank has consulted with banks and the financial sector in recent weeks about the possible changes. English said: “Excessive credit growth, followed by a bust, was at the core of the global financial crisis [GFC]”. English said there was risk that the bubble could burst after rising Auckland house prices, “if they were left to run their course”. An IMF report out earlier this week said house prices in New Zealand were 25 per cent overvalued. While New Zealand banks avoided the worst of the GFC, the Government has now agreed to the Reserve Bank having extra measures to reduce New Zealand’s vulnerability. The four new measures, if needed, would force banks to hold extra capital on their balance sheets as a buffer during a wide credit boom. Banks could also be forced to hold extra capital against in specific sectors, if risks emerged in those areas. They could also be told to use more stable sources of funding, to avoid the risk of a short-term shortage of money. Finally, banks could be forced to ration the amount of money they lend with low deposits, so called-high loan-to-value ratio (LVR) lending in the housing sector. At this stage, the extra tools would only apply to registered banks, which do most of the lending to households and businesses. Under the new agreement signed by Wheeler and English, the Reserve Bank would “consult” the finance minister ahead of bringing in the new tools. But ultimately the Reserve Bank would make the final policy decision. For more information, please visit power bank for sale
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