Staunch opposition to DTI proposal

Opposition to the inclusion of debt-to-income ratios (DTIs) in the Reserve Bank’s macro prudential tool kit is widespread, the bank’s own consultation reveals.

The Reserve Bank has released the submissions it received on its public consultation on DTIs and the majority come down firmly against the proposal.

The NZ Bankers Association believes the Reserve Bank’s consultation paper does not establish that the benefits of a DTI would outweigh the costs and that more analysis is required.

It says DTIs might create a number of unintended consequences for the housing market and the economy and that there are sufficient serviceability rules and processes already in place to assess affordability and respond to market conditions.

The big banks’ submissions on the prospect of a DTI all support this view.

ANZ does not support a DTI tool believes the Reserve Bank’s existing macro prudential tools are sufficient.

It says that the DTI tool as proposed is fundamentally flawed as it is not a measure of affordability.

“It is an unsophisticated measure which does not take into account individual borrower characteristics like after-tax income, household costs, other outgoings and the interest rate environment.”

ANZ says lending practices are sufficiently strong in mitigating risk relating to rising interest rates and believes policies to ensure serviceability assessment are appropriate and robust.

“If serviceability restrictions are to be imposed, a serviceability framework based on interest rate sensitivity would provide more effective control over mortgage lending affordability and is more straightforward to implement and monitor.”

For ASB, the DTIs are a crude measure of affordability and unlikely to protect against borrower default risk due to rising interest rates or unemployment.

“We would never consider assessing a customers ability to service a loan based on a DTI alone.

“Rather we conduct comprehensive servicing assessments based in borrowers’ individual characteristics and apply servicing test rate buffers to ensure customers can meet repayment obligations at times of rising interest rates.”

ASB does not consider the Reserve Bank has adequately quantified what risk or the sort of DTI levels that would create a systemic risk that would require the addition of DTIs to the macro prudential tool kit.

“We believe it would be more appropriate for the Reserve Bank to play a larger role in benchmarking the servicing assessment processes of the banks to provide for system strength rather than continuing to pursue DTI restrictions.”

BNZ also described DTIs as a relatively crude measure of loan servicing capacity and says the deployment of such a tool should only occur when there is a compelling case for its use.

It says the Reserve Bank might wish to consider closer assessment of bank loan servicing calculations as a potential pre-cursor to the deployment of a DTI tool.

“It is likely these servicing calculations will be more accurate predictors of potential stress than DTI measures which are ‘blunter’ instruments.

“Through its prudential oversight activity, RBNZ may be able to achieve the intended outcomes, but via a process that is arguably more accurate and easier for banks to deploy.”

Westpac says that, in isolation, a DTI is not a suitable calculation for the assessment and approval of credit risk.

“If DTIs are introduced, it is important that the policy is clear and not overly complex so that it can be understood by both borrowers and lenders.”

In response to the submissions, the Reserve Bank reiterated that it does not believe DTI restrictions should be deployed in the current housing market environment.

It says it considers that the key longer term solution to housing market imbalances is to facilitate growth in housing supply in areas that need it.

“However, the Reserve Bank remains of the view that individual bank lending decisions may fail to take account of their impact on systemic risk during periods of intense competition for mortgage loans, and that there can be a role for limits on banks’ serviceability practices during these periods.”

The Reserve Bank’s memorandum of understanding with the Minister of Finance is due to be reviewed in May 2018 and it thinks the potential future use of DTIs could be reconsidered as part of that wider review.

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