RBNZ – Page 4 – Digital Finance Analytics (DFA) Blog

New Zealand Reserve Bank Cuts Cash Rate To 1.5%

The Official Cash Rate (OCR) has been reduced to 1.5 percent. They signalled risks from China and Australia, and that lower mortgage rates might help household finances and housing.

The Monetary Policy Committee decided a lower OCR is necessary to support the outlook for employment and inflation consistent with its policy remit.

Global economic growth has slowed since mid-2018, easing demand for New Zealand’s goods and services. This lower global growth has prompted foreign central banks to ease their monetary policy stances, supporting growth prospects.

However, there is uncertainty about the global economic outlook. Trade concerns remain, while some other indicators suggest trading-partner growth is stabilising.

Domestic growth slowed from the second half of 2018. Reduced population growth through lower net immigration, and continuing house price softness in some areas, has tempered the growth in household spending. Ongoing low business sentiment, tighter profit margins, and competition for resources has restrained investment.

Employment is near its maximum sustainable level. However, the outlook for employment growth is more subdued and capacity pressure is expected to ease slightly in 2019. Consequently, inflationary pressure is projected to rise only slowly.

Given this employment and inflation outlook, a lower OCR now is most consistent with achieving our objectives and provides a more balanced outlook for interest rates.

Summary record of meeting – May 2019 Statement

The Monetary Policy Committee agreed on the economic projections outlined in the May 2019 Statement in order to provide a sound basis on which to form its OCR decision.

The Committee noted that inflation is currently slightly below the mid-point of the inflation target, and that employment is broadly at the targeted maximum sustainable level. However, the members agreed that given the recent weaker domestic spending, and projected ongoing growth and employment headwinds, there was a need for further monetary stimulus to meet its objectives.

The Committee agreed that the risks to achieving its consumer price inflation and maximum sustainable employment objectives were broadly balanced around the projection. Possible alternative outcomes were noted on the upside and downside.

A key downside risk relating to the growth projections was a larger than anticipated slowdown in global economic growth, particularly in China and Australia, New Zealand’s largest trading partners. The Committee agreed that the projections adequately captured the observed global slowdown and its impact on domestic employment and inflation.

The Committee noted that additional stimulus from central banks had underpinned growth and reduced the likelihood of a more-pronounced slowdown. With some indicators of global growth improving in recent months, a faster recovery in global growth was possible. However, on balance, the Committee was more concerned about a continued slowdown rather than a faster recovery.

The Committee discussed other potential risks to domestic spending. The members acknowledged the importance of additional spending from households, businesses, and the government, to meet their inflation and employment targets. However, they noted several important uncertainties.

The Committee noted upside and downside risks to the investment outlook. Capacity pressure could see investment increase faster than assumed. On the downside, if sentiment remained low as profitability remains squeezed, investment might not increase as anticipated over the medium term. It was also noted that firms’ ability to invest is constrained by the current competition for resources.

A potential source of additional demand discussed by the Committee included government spending being higher than currently projected, in view of the current strength of the Crown balance sheet. This view was balanced by the impact of any increase in government investment being delayed, for example due to timing of the implementation of new initiatives and current capacity constraints in the construction sector. The implications for monetary policy remain to be seen.

Some members noted that with lower mortgage rates and easing of loan-to-value requirements, any possible pick-up in the housing market could support household spending growth more than anticipated.

The Committee noted that employment is currently near its maximum sustainable level. However, it was agreed that the outlook for employment growth is more subdued and capacity pressure is expected to ease slightly in 2019.

The Committee agreed that overall risks to the inflation projection were balanced. The Committee noted the outlook for inflation is below the target mid-point for longer than projected in the February Statement.

The recent period of rising domestic inflation was discussed. The Committee noted that the near-term outlook was more subdued due to lower capacity pressure. It was also noted that cost pressures remain elevated, and that there is a risk firms may pass these costs on as higher consumer prices by more than assumed. However, it was agreed that inflation expectations remain well anchored at the mid-point of the target range.

The Committee also noted the relatively subdued private sector wage growth, despite businesses suggesting that the inability to find labour is a significant constraint on their growth. The Committee noted the limited pass-through of the nominal wage growth to consumer price inflation.

Some members noted slower global growth reducing imported inflation was a downside risk to the inflation outlook.

The Committee reached a consensus that, relative to the February Statement, a lower path for the OCR over the projection period was appropriate. The lower path reflected the economic projections and the balance of risks discussed, and is consistent with both inflation and employment remaining near the Committee’s objectives.

After discussing the relative benefits of holding the OCR and committing to a downward bias, versus cutting the OCR now so as to establish a more balanced outlook for interest rates, the Committee reached a consensus to cut the OCR to 1.50 percent.

RBNZ Bank Financial Strength Dashboard wins international award

Central Banking Publications has named the Bank Financial Strength Dashboard as ‘Initiative of the Year’ in its annual awards.

In announcing the award, Central Banking commented that very few central banks have opened up their financial system to public scrutiny to quite the same level as the Reserve Bank of New Zealand.

They said that by revealing key metrics on the banking sector in a visual format that can be taken in at a glance, the Reserve Bank has hit on a simple method of boosting discipline among banks.

Reserve Bank Governor Adrian Orr said the award was a great honour.

“We aspire to be a ‘Great Team, Best Central Bank’ and the award recognises a significant step towards that goal,” Mr Orr said.

“Awareness among consumers and investors is an important aspect of ensuring a sound financial system. The Dashboard is designed to make it easy to access and understand the financial position of New Zealand banks. By keeping the public informed about risks to the sector, banks themselves are held to greater market discipline.

“The Dashboard has proven very popular, with more than 10,000 visits per quarter since its launch and we believe this has significantly broadened the audience for prudential disclosures.

“It is the result of huge effort and dedication from many people in our organisation and the sector at large. I congratulate them all and encourage people to use the Dashboard when making banking decisions,” Mr Orr said.

Background

Central Banking Publications is a financial publisher owned by Incisive Media and specialising in public policy and financial markets, with emphasis on central banks, international financial institutions and financial market infrastructure and regulation.

Central Banking Publications was founded in 1990, and makes a number of annual awards to central banks and market participants over a range of categories. This is the sixth year of the awards.

The Reserve Bank previously won the ‘Initiative of the year’ award in 2016 for its enterprise risk management system. It has also won ‘Central Bank of the Year’ in 2015 and Reserve Bank senior adviser Leo Krippner won the award for ‘Economics in Central Banking’ in 2017.

Judging was by the Central Banking Awards Committee, which is made up of the Central Banking Editorial Team and Editorial Advisory Board, comprising former senior central bank governors from around the world. The awards will be presented at a gala dinner in London on 13 March.

Bailing In And Bailing Out: The Latest Update From New Zealand

I discuss the latest developments in the New Zealand property market with Joe Wilkes. We look at the latest from the Reserve Bank, Deposit Bail-In and Bank Scorecards. Also highly relevant to other markets.

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RBNZ To Ease Loan To Value Restrictions

The Reserve Bank New Zealand says that risks to New Zealand’s financial system have eased over the past six months, but vulnerabilities persist. In particular, households remain exposed to financial shocks due to their large mortgage debt burden.

But they are easing the loan to value restrictions from January 2019.

Up to 20 percent (increased from 15 percent) of new mortgage loans to owner occupiers can have deposits of less than 20 percent.
Up to 5 percent of new mortgage loans to property investors can have deposits of less than 30 percent (lowered from 35 percent).

They say that both mortgage credit growth and house price inflation have eased to more sustainable rates, reducing the riskiness of banks’ new housing lending. In response, we are easing our loan-to-value ratio (LVR) restrictions on banks’ new mortgage loans. If banks’ lending standards are maintained we expect to further ease LVR restrictions over the next few years.

Debt levels also remain high in the agriculture sector, particularly for dairy farms, implying ongoing financial vulnerability. Balance sheets need to be further strengthened. In the medium-term, an industry response to a variety of climate change-related challenges appears likely, requiring investment.

While domestic risks have eased, global financial vulnerability has risen. Significant build-ups in debt and asset prices, and ongoing geopolitical tensions, overhang financial markets. This vulnerability is highlighted by the current elevated price volatility in equity and debt markets. New Zealand’s exposure to these global risks has reduced somewhat, as New Zealand banks have become less reliant on short-term, and foreign, funding.

The domestic banking system remains sound at present. We are using this period of relative calm to reassess whether the banking system has sufficient capital to weather future extreme shocks. Our preliminary view is that higher capital requirements are necessary, so that the banking system can be sufficiently resilient whilst remaining efficient. We will release a final consultation paper on bank capital requirements in December.

The banking system remains profitable, reflecting banks’ low operating costs and strong asset performance. While positive overall, banks’ low costs have been partly achieved through underinvestment in core IT infrastructure and risk management systems in New Zealand. This was highlighted in our review of bank’s conduct and culture with the Financial Markets Authority. We will be jointly reviewing banks’ responses to our review in March 2019, and following up as required.

CBL Insurance Ltd was placed into full liquidation by the High Court on 12 November. Aside from CBL, the insurance sector as a whole is meeting its minimum capital requirements. However, capital strength has declined and a number of insurers are operating with small buffers. The insurance industry must ensure it has sufficient capital to maintain solvency in all business conditions. Our ongoing review of conduct and culture in the insurance sector with the Financial Markets Authority will illuminate the industry’s risk management capability. The review will be released in January 2019.

RBNZ Official Cash Rate unchanged at 1.75 percent

The Reserve Bank of New Zealand has kept the Official Cash Rate (OCR) at 1.75 percent. They expect to keep the OCR at this level through 2019 and into 2020. Their latest statement on monetary policy was released.

There are both upside and downside risks to our growth and inflation projections. As always, the timing and direction of any future OCR move remains data dependent.

The pick-up in GDP growth in the June quarter was partly due to temporary factors, and business surveys continue to suggest growth will be soft in the near term. Employment is around its maximum sustainable level. However, core consumer price inflation remains below our 2 percent target mid-point, necessitating continued supportive monetary policy.

GDP growth is expected to pick up over 2019. Monetary stimulus and population growth underpin household spending and business investment. Government spending on infrastructure and housing also supports domestic demand. The level of the New Zealand dollar exchange rate will support export earnings.

As capacity pressures build, core consumer price inflation is expected to rise to around the mid-point of our target range at 2 percent.

Downside risks to the growth outlook remain. Weak business sentiment could weigh on growth for longer. Trade tensions remain in some major economies, raising the risk that trade barriers increase and undermine global growth.

Upside risks to the inflation outlook also exist. Higher fuel prices are boosting near-term headline inflation. We will look through this volatility as appropriate. Our projection assumes firms have limited pass through of higher costs into generalised consumer prices, and that longer-term inflation expectations remain anchored at our target.

We will keep the OCR at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low and stable inflation.

NZ Reserve Bank Consults On DTI Restrictions

The NZ Reserve Bank has released its consultation paper on possible DTI restrictions. The 36+ page report is worth reading as it sets out the risks ensuring from high risk lending, leveraging experience from countries such as Ireland.

Interestingly they build a cost benefit analysis, trading off a reduction in the costs of a housing and financial crisis with a reduction in the near-term level of economic activity as a result of the DTI initiative and the cost to some potential homebuyers of having to delay their house purchase.

Submissions on this Consultation Paper are due by 18 August 2017.

In 2013, the Reserve Bank introduced macroprudential policy measures in the form of loan to-value ratio (LVR) restrictions to mitigate the risks to financial system stability posed by a growing proportion of residential mortgage loans with high LVRs (i.e. low deposit or low equity loans). This increase in borrower leverage had gone hand-in-hand with significant increases in house prices, particularly in Auckland. The Reserve Bank’s concern was the possibility of a sharp fall in house prices, in adverse economic circumstances where some borrowers had trouble servicing loans. Such an event had the potential to undermine bank asset quality given the limited equity held by some borrowers.

The Reserve Bank believes LVR restrictions have been effective in reducing the risk to financial system stability that can arise due to a build-up of highly-leveraged housing loans on bank balance sheets. However, LVRs relate mainly to one dimension of housing loan risk. The other key component of risk relates to the borrower’s capacity to service a loan, one measure of which is the debt-to-income ratio (DTI). All else equal, high DTI ratios increase the probability of loan defaults in the event of a sharp rise in interest rates or a negative shock to borrowers’ incomes. As a rule, borrowers with high DTIs will have less ability to deal with these events than those who borrow at more moderate DTIs. Even if they avoid default, their actions (e.g. selling properties because they are having difficulty servicing their mortgage) can increase the risk and potential severity of a housing related economic crisis.

While the full macroprudential framework will be reviewed in 2018, the Reserve Bank has elected to consult the public prior to the review. This consultation concerns the potential value of a policy instrument that could be used to limit the extent to which banks are able to provide loans to borrowers that are a high multiple of the borrower’s income (a DTI limit). A number of other countries have introduced DTI limits in recent years, often in association with LVR restrictions. In 2013, the Bank and the Minister of Finance agreed that direct, cyclical controls of this sort would not be imposed without the tool being listed in the Memorandum of Understanding on Macroprudential Policy (the MoU). Hence, cyclical DTI limits will only be possible in the future if an amended MoU is agreed.

The purpose of this consultation is for the Reserve Bank, Treasury and the Minister of Finance to gather feedback from the public on the prospect of including DTI limits in the Reserve Bank’s macroprudential toolkit.

Throughout the remainder of the document we have listed a number of questions, but feedback can cover other relevant issues. Information provided will be used by the Reserve Bank and Treasury in discussing the potential amendment of the MoU with the Minister of Finance. We present evidence that a DTI limit would reduce credit growth during the upswing and reduce the risk of a significant rise in mortgage defaults during a subsequent severe economic downturn. A DTI limit could also reduce the severity of the decline in house prices and economic growth in that severe downturn (since fewer households would be forced to sharply constrain their consumption or sell their house, even if they avoided actual default). The strongest evidence that these channels could materially worsen an economic downturn tends to come from countries that have experienced a housing crisis in recent history (including the UK and Ireland). The Reserve Bank believes that the use of DTI limits in appropriate circumstances would contribute to financial system resilience in several ways:

– By reducing household financial distress in adverse economic circumstances, including those involving a sharp fall in house prices;
– by reducing the magnitude of the economic downturn, which would otherwise serve to weaken bank loan portfolios (including in sectors broader than just housing); and
– by helping to constrain the credit-asset price cycle in a manner that most other macroprudential tools would not, thereby assisting in alleviating the build-up in risk accompanying such cycles.

The policy would not eliminate the need for lenders and borrowers to undertake their own due diligence in determining that the scale and terms of a mortgage are suitable for a particular borrower. The focus would be systemic: on reducing the risk of the overall mortgage and housing markets becoming dysfunctional in a severe downturn, rather than attempting to protect individual borrowers. The consultation paper notes that DTIs on loans to New Zealand borrowers have risen sharply over the past 30 or so years, with further increases evident since 2014. This partly
reflects the downward trend in interest rates over the period. However, interest rates may rise in the future. While the Reserve Bank is continuing to work with banks to improve this data, the available data also show that average DTIs in New Zealand are quite high on an international basis, as are New Zealand house prices relative to incomes.

Other policies (such as boosting required capital buffers for banks, or tightening LVR restrictions further) could be used to target the risks created by high-DTI lending. The Bank does not rule out these alternative policies (indeed, we are currently undertaking a broader review of capital requirements in New Zealand) but consider that they would not target our concerns around mortgage lending as directly or effectively. For example, while higher capital buffers would provide banks with more capacity to withstand elevated housing loan defaults, they would do little to mitigate the feedback effects between falling house prices, forced sales and economic stress.

The Reserve Bank has stated that it would not employ a DTI limit today if the tool was already in the MoU (especially given recent evidence of a cooling in the housing market and borrower activity), it believes a DTI instrument could be the best tool to employ if house prices prove resurgent and if the resurgence is accompanied by further substantial volumes of high DTI lending by the banking system. The Reserve Bank considers that the current global environment, with low interest rates expected in many countries over the next few years, tends to exacerbate the risk of asset price cycles arising from ‘search for yield’ behaviour, making the potential value of a DTI tool greater.

The exact nature of any limit applied would depend on the circumstances and further policy development. However, the Reserve Bank’s current thinking is that the policy would take a similar form to LVR restrictions. This would involve the use of a “speed limit”, under which banks would still be permitted to undertake a proportion of loans at DTIs above the chosen threshold. By adopting a speed limit approach, rather than imposing strict limits on DTI ratios, there would be less risk of moral hazard issues arising from a particular ratio being seen as “officially safe”. Exemptions similar to those available within the LVR restriction policy would also be likely to apply.

Measuring Home Price Trends Is Hard

Interesting note from the New Zealand Reserve Bank, “Evaluating alternative monthly house price measures for New Zealand” which highlights that whilst there are various methods which can be applied to measuring home prices, none is perfect. The data-intensive “Hedonic” approach as advocated by some in Australia, did not come out on top.

They also highlight the “quality-mix problem, which refers to the fact that the composition of houses sold will differ from period to period, making it difficult to discern whether observed price changes reflect genuine movements in underlying house prices or simply changes in the composition of houses sold. For example, prices may increase from one month to the next simply because of an increase in the average size of
houses sold. Larger homes tend to sell for higher prices, so it’s not clear whether the observed increases in prices represent genuine market movements or simply changes in sales composition. This quality-mix problem is of particular concern in the property market since
housing quality varies significantly along multiple dimensions.

This paper outlines the production of three monthly house price indices (HPIs) for New Zealand produced using data from the Real Estate Institute of New Zealand (REINZ) using three alternative methodologies. REINZ approached the Reserve Bank of New Zealand at the end of 2015 for technical guidance on possible improvements to their house price index methodology, in light of significant improvements to their dataset in recent years. The paper documents the guidance, providing an overview of the alternative methodologies and an empirical evaluation of the resulting indices.

The database provided by REINZ is a rich unit-record sales dataset with information on price, location, valuation, and property characteristics (such as the number of bedrooms and the floor area). We use the database to produce HPIs based on three well-established and widely adopted methodologies: 1) sales-price to appraisal ratio (SPAR); 2) hedonic regression; and 3) repeat sales. All three methods are found to produce credible-looking indices, which match the turning points and well-established cyclical properties of New Zealand’s existing house price statistics.

As a benchmarking exercise, the three candidate indices are evaluated alongside a simple median and a stratified median index (similar to the methodology currently used by REINZ). Applying a range of criteria to assess index performance, we find that all three alternative candidate methodologies out-perform the simple median and the stratified median methodologies.

The SPAR method is found to perform the best, due to lower month-to-month noise (especially for more disaggregated regional indices), greater stability as more data are added, robustness to sample changes, and higher accuracy in predicting sales prices.

NZ Official Cash Rate unchanged at 1.75 percent

The NZ Reserve Bank today left the Official Cash Rate (OCR) unchanged at 1.75 percent.

Core inflation is running 1.5-2%, and they believe they are on track to be within their 2-3% target range ahead. Wage growth remains sluggish, despite high participation rates.

The macroprudential policies (loan-to-value based) they have implemented have trimmed house price growth significantly, (nationwide monthly house price inflation has averaged 0.1 percent over the past five months, compared to 2.1 percent in the five months prior), although they said they also believe housing supply is important. The number of house sales nationwide has fallen by about 20 percent since its peak in April 2016. NZ regulators deserve recognition for their integrated and successfully implemented policies.

The steepening in wholesale rates has flowed through to rising fixed-term mortgage rates, with the 2-year mortgage rate rising by 45 basis points since their November Statement. They are also doing significant work on debt-to-income ratios, but have not yet implemented measures on this basis. The NZ Government wants to see a cost benefit analysis of these measures before they are implemented.

The recovery in commodity prices and more positive business and consumer sentiment in advanced economies have improved the global outlook. However, major challenges remain with on-going surplus capacity in the global economy and rising geo-political uncertainty.

Global headline inflation has increased, partly due to rising commodity prices. Global long-term interest rates have increased. Monetary policy is expected to remain stimulatory, but less so going forward, particularly in the US.

New Zealand’s financial conditions have firmed with long-term interest rates rising and continued upward pressure on the New Zealand dollar exchange rate. The exchange rate remains higher than is sustainable for balanced growth and, together with low global inflation, continues to generate negative inflation in the tradables sector. A decline in the exchange rate is needed.

Economic growth in New Zealand has increased as expected and is steadily drawing on spare resources. The outlook remains positive, supported by ongoing accommodative monetary policy, strong population growth, increased household spending and rising construction activity. Dairy prices have recovered in recent months but uncertainty remains around future outcomes.

Recent moderation in house price inflation is welcome, and in part reflects loan-to-value ratio restrictions and higher mortgage rates. It is uncertain whether this moderation will be sustained given the continued imbalance between supply and demand.

Headline inflation has returned to the target band as past declines in oil prices dropped out of the annual calculation. Inflation is expected to return to the midpoint of the target band gradually, reflecting the strength of the domestic economy and despite persistent negative tradables inflation. Longer-term inflation expectations remain well-anchored at around 2 percent.

Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.

NZ Growth Looks Promising

The prospects look promising for New Zealand’s economic expansion to continue in the face of considerable international uncertainties, Reserve Bank Governor Graeme Wheeler said today.

Figure 1 - Summary Macro-economic Indicators relative to trend

Speaking to the Development West Coast Conference in Greymouth, Mr Wheeler said that in many respects the economy is performing well.

“Relative to the trends over the past two decades, New Zealand is experiencing stronger economic growth, lower inflation, and a lower unemployment rate – even with record levels of labour force participation. The Achilles heel of many New Zealand expansions – a large current account deficit – has not eventuated.

“However, not everything is as positive. The overall expansion, now entering its eighth year, is weaker than other post-WWII expansions. GDP growth on a per capita basis has been slow and labour productivity growth has been disappointing. House price inflation is much higher than desirable and poses concerns for financial stability, and the exchange rate is higher than the economic fundamentals would suggest is appropriate.”

Mr Wheeler said that, in the absence of major unanticipated shocks, prospects look good for continued strong growth over the next 18 months, driven by construction spending, continued migration, tourist flows, and accommodative monetary policy. Supply disruptions associated with the Kaikoura earthquake are unlikely to have a major impact on overall economic growth, while some increase in freight costs and construction cost inflation is likely.

“Our November 2016 Monetary Policy Statement forecasts show annual real GDP growth of around 3¾ percent over the next 18 months, with inflation approaching the mid-point of the target band, the unemployment rate continuing to decline, and the current account deficit remaining within manageable levels.

“The low point for CPI inflation has probably passed and, supported by the improvement in global commodity prices in recent months, we expect the December quarter 2016 CPI data to confirm that annual CPI inflation is moving back within the 1 to 3 percent target band.

Mr Wheeler said that New Zealand will enter 2017 with considerable political and economic uncertainties.

“The greatest threat to the expansion lies in possible international political and economic developments and their implications for the global trading environment. The main domestic risk – and one that could be triggered by developments offshore – is a significant correction in the housing market. Numerous measures indicate that New Zealand house prices are significantly inflated relative to usual valuation indicators.”

“As has been the case in several other countries, monetary policy has been made more challenging in New Zealand by low global inflation and zero or negative policy rates in several major economies. This has put downward pressure on our interest rate structure and contributed to asset price inflation and upward pressure on the New Zealand dollar. This trend may finally be turning.

“At this stage, global and domestic developments do not cause us to change our view on the direction of monetary policy as outlined in the November MPS. We expect monetary policy to continue to be accommodative, and that the projected policy settings will help generate sufficient growth to have inflation settle near the middle of the target range.”

NZ Financial system continues to face housing and dairy risks

New Zealand’s financial system is sound but continues to face risks, Reserve Bank Governor, Graeme Wheeler, said today when releasing the Bank’s November Financial Stability Report.

“Global GDP growth has been subdued, despite extremely accommodative monetary policy in a number of countries. Financial markets have remained volatile due to heightened political uncertainty.

“Dairy prices have recovered in recent months and the average dairy farm is now expected to return to profitability this season. However, indebtedness in the sector has increased as farms have had to borrow to absorb losses over the past two seasons, leaving the sector vulnerable to future shocks. Some farms remain under pressure and problem loans are likely to continue to increase for a time.

“House price inflation in Auckland has softened in recent months but it is uncertain whether this will be sustained. House price to income ratios in the region remain among the highest in the world and prices are continuing to rise rapidly in the rest of the country. There is a significant risk of further upward pressure on house prices so long as the imbalance between housing demand and supply remains.

“The Reserve Bank has asked the Minister of Finance to agree to add a Debt to Income (DTI) tool to the Memorandum of Understanding on macro-prudential policy. While the Bank is not proposing use of such a tool at this time, financial stability risks can build up quickly and restrictions on high-DTI lending could be warranted if housing market imbalances were to deteriorate further.”

Deputy Governor, Grant Spencer, said: “New restrictions on lending to property investors with high loan to value ratios (LVRs) came into force on 1 October. These restrictions, along with the earlier LVR restrictions, are increasing the resilience of bank balance sheets to a downturn in the housing market.

“However, the share of bank mortgage lending to customers with high DTI ratios has been increasing and this could increase the rate of loan defaults during a housing downturn.

“The banking system has strong capital and funding buffers and profitability remains high. Despite being relatively concentrated, New Zealand’s banking system also appears to be operating efficiently from an international perspective based on metrics such as the cost-to-income ratio and the spread between lending and deposit rates.

“However the banking system’s reliance on offshore wholesale funding is beginning to increase due to a widening gap between credit and deposit growth. Banks could become more susceptible to increased funding costs and reduced access to funding in the event of heightened financial market volatility.

“Damage from the magnitude 7.8 Kaikoura earthquake on 14 November is being assessed. While it is too early to estimate the cost to insurers, the sector is well positioned in terms of catastrophe reinsurance cover and capital buffers.

“The Reserve Bank continues to make progress on a number of regulatory initiatives, including a review of bank capital requirements, amendments to the outsourcing policy for banks and a dashboard approach to quarterly disclosure.”