Consultation focuses on two types of debt serviceability restrictions
The Reserve Bank of New Zealand (Reserve Bank or RBNZ) seeks industry feedback on the merits and design features of the debt serviceability restrictions (DSRs) on residential mortgage lending as it prepares to implement the rules in case financial stability risks warrant them.
The Reserve Bank's industry consultation focuses on two types of DSRs:
- Restrictions on debt-to-income (DTI) ratios, imposing a cap on debt as a multiple of income; and
- A floor on the test interest rates used by banks in their serviceability assessments that test the ability of borrowers to continue repaying their loans if interest rates rise to a certain level.
“Although the financial system remains strong and banks are well-capitalised, we are concerned that the combination of very high debt levels and unsustainable house prices poses financial stability risks, particularly if current high-risk lending flows remain unchecked. Adding more options to our macroprudential toolkit will help us to address these risks if needed,” said RBNZ Deputy Governor Geoff Bascand.
The RBNZ will accept feedback from interested parties until 5:00pm on February 28, 2022.
Read more: Did the Reserve Bank overstimulate the economy?
Aside from reviewing the merits and design features of the DSRs on residential mortgage lending, the Reserve Bank is reviewing its policy for overseas banks' branches in the country to adapt to the evolving global regulatory environment.
According to Bascand, the review intends to create a simple, coherent, and transparent policy framework for branches of overseas banks, including ANZ Banking Group Limited, Bank of China, Commonwealth Bank of Australia, Westpac Banking Corporation, and ASB Bank Limited.
“Overseas branches are a growing part of our financial system, and it is timely to ensure their regulation and supervision promotes financial stability and that we are well placed to avoid significant damage to the financial system that could result if one failed,” Bascand said in a statement released last month.
The central bank seeks submissions on the policy questions in its Branch Policy consultation and any alternative options or proposals until March 02, 2022.
