A gut feeling that banks may not have learned their lesson around prudent lending is holding Reserve Bank governor Adrian Orr back from easing loan-to-value restrictions.
The regulator gave the financial system a pass mark in its half-yearly Financial Stability Report (FSR) on Tuesday, but said it wanted to see the moderation of mortgage lending growth continue before it would be confident enough to loosen its restrictions on how much banks can lend to home buyers.
Orr said changes to the restrictions before the next Financial Stability Report in six months’ time would not be considered.
“Because we have seen the growth slowing we’re thinking about the easing but we have just pulled up short this time and thought ‘No, too early’”, Orr told the financial and expenditure select committee later on Tuesday.
“I think the most instructive bit is that bank lending really does respond to where those LVRs are set, so they were pushing as close as they could get without risk of breach to the LVR,” he said.
“As they have eased you have seen the banking market again adapt and move back to about where those levels are.
It’s a great question, hence my angst around this. That’s why we are just sitting there.
At the press conference following the release of the FSR, Orr said the decision by interim Reserve Bank governor Grant Spencer to relax the restrictions last year, prompting a minor re-heating of the market, was not a mistake because it allowed the regulator to observe how the banks behaved in response.
What the Reserve Bank saw doesn’t seem to have filled it with confidence that the banks could be trusted to be prudent without any restrictions on their lending.
“Our challenge around confidence is to think, ‘what would happen in the absence of those LVRs?’” Orr said
“Would banks go back to their less prudent lending behaviours, or would they have picked up a lesson? So it is going to be an iterant process for us.
Asked what his “gut feeling” was about how banks would respond, Orr said: “It’s a great question, hence my angst around this.
“That’s why we are just sitting there. I think part of this bank conduct review will be an interesting time to talk about their lending horizons.”
Orr keen on DTIs
The Reserve Bank is still keen on adding more tools to its macro-prudential toolkit.
Orr is particularly keen to add the ability to impose “debt-to-income” restrictions, which would set strict limits on how much banks could lend to home buyers based on the borrower’s income.
“We are positively pursuing them through the Reserve Bank review of our legislation,” Orr said.
“We really do want to get our heads around it. If it is a tool where no one is worse off and someone may be better off then we would like to add it to our tool kit,” he said.
But he told the select committee he would much rather the Reserve Bank, as banking regulator, could trust banks and borrowers to be prudent.
“I would love to not have to be active in that space. If banks had true long-term horizons, if the consumers were fully aware and myopia didn’t exist across borrowers, all the different foibles that people have, then you wouldn’t need the regulatory imposts.”