by Dan Dunkley
RBNZ announced the details of the second phase of the Reserve Bank Act review this afternoon. It will look at a wide range of items including the bank's governance, supervision and enforcement, crisis management, and funding.
Yet the mention of the Reserve Bank’s macro-prudential toolkit will raise alarm for mortgage advisers. Over the past few years, figures within the Reserve Bank have called for the bank to look at new ways of assessing borrowers’ ability to repay loans. Suggestions have included controversial debt-to-income ratios, or DTIs.
DTIs has been widely dismissed as a crude tool that does not accurately reflect a customer’s ability to repay a loan. Used on their own, they fail to take into account the size of a borrower’s deposit, for example.
New Zealand's major banks say their serviceability assessments are up to the task. Advisers say banks have moved to tighten servicing criteria over the past 18 months, partly due to the threat of new regulation, such as DTIs, to curb lending.
Last year, the Reserve Bank launched a consultation on DTIs but faced criticism from lenders. Responding to the consultation ANZ said DTIs were “unsophisticated” and did not "take into account individual borrower characteristics like after-tax income, household costs, other outgoings and the interest rate environment”.
Yet the Reserve Bank has continued to talk up the prospects of introducing DTIs. In March, acting governor Grant Spencer called DTIs a “natural complement” to the current macroprudential toolkit.
RBNZ governor Adrian Orr is likely to be in favour of introducing DTIs to control lending. In the Reserve Bank’s recent Financial Stability Report, Orr said the bank was “positively pursuing” introducing DTI restrictions. He has sent out mixed messages on the topic, however. In a recent interview with RNZ, Orr admitted DTIs were a “brutally blunt” way of controlling lending.
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