Increased capital requirements 'could make loans more expensive'

The Reserve Bank is reviewing the housing loan capital adequacy requirements for New Zealand banks and has released a consultation paper.

The requirements dictate how much a bank must have set aside to cover potential losses from mortgage lending.They are reviewed periodically.

Deputy governor Grant Spencer said the Reserve Bank wanted to ensure the requirements adequately reflected the risks involved in lending to the housing sector. "The bank is proposing higher capital requirements for high LVR loans."

The paper says borrowers with high LVR loans are more exposed to systemic risk than those with low LVR lending. "If economic conditions change for the worse, and in view of the current state of the housing market, there is a risk that borrowers most exposed to adverse changes in general economic conditions could all come under pressure at the same time, with a corresponding impact on the quality of banks’ housing loan portfolios. This is an important motivation for reviewing the balance between systemic and idiosyncratic risk within banks’ housing portfolios."