Part 2 of a 2-part story on the macroprudential & LVR review
I found much of the review commentary from the Reserve Bank & Treasury either wishy-washy or sliding off topic, when I wanted to pinpoint a purpose, a direction, clear options and a reason for choosing one path over another. This review announcement seemed the appropriate time for those firm inputs from the 2 organisations, leading into the next stage of review before moving to legislation.
Who’s this Piers bloke?
It didn’t help that the superb helper in compiling some of the material, and author of the paper on mitigating the likelihood & severity of boom-bust cycles, Piers Ovenden, was described in the Reserve Bank & Treasury documents as “a New Zealander who has previously worked as a Bank of England official and as a senior solicitor at Russell McVeagh”.
That seemed dismissive, when I thought the Reserve Bank & Treasury should be proclaiming their expertise in researching & leading policy in areas that can break individuals if applied badly, or raise the quality & performance of economic activity if applied well.
Mr Ovenden, whom I haven’t met, is somewhat more than the quoted worker-bee in both breadth of education & depth of topic. His LinkedIn profile discloses that he graduated from 3 English universities where he studied languages, history & law for a total 9 years (Oxford, University College London & The College of Law), and began his legal career at Linklaters in London in 2001, working on debt capital markets in London, Hong Kong & Singapore, and finishing with a 7-month secondment to Credit Suisse in 2005.
In New Zealand, he joined Russell McVeagh’s finance team as a senior solicitor in 2006, worked on the establishment of New Zealand’s first 2 covered bond programmes, BNZ then ANZ, and was seconded to ANZ National Bank in 2010.
Mr Ovenden returned to London in 2011 as a general counsel associate at the Financial Services Authority, moving with his team to the Bank of England’s Prudential Regulation Authority in 2013. He was acting deputy head of legal, senior legal counsel & manager at the Bank of England over the next 4 years, returning to New Zealand as the Financial Markets Authority’s senior policy solicitor for 16 months.
He’s been at the Reserve Bank since last October, as macro financial policy advisor.
Figures & background
From Mr Ovenden in the paper on mitigating boom-bust cycles, you get some figures to indicate better or worse performance, and some background on earlier research. The section on LVRs (pages 20-21 of the paper) reads eminently sensibly.
I’ve drawn 3 paragraphs from the LVR section (below), which are followed in the paper by a counterbalancing section on potential costs to efficiency:
“This [LVR] section draws heavily on a recently published analysis of the experience with the LVR policy over the past 5 years (Lu, 2019), along with more formal modelling of the impact of the LVR policy on the resilience of the banking system (Bloor & Lu, 2019). This work suggests that LVR policy since 2013 has significantly reduced potential mortgage losses as a share of bank capital, even after accounting for reduced bank capital ratios due to lower LVRs reducing bank capital requirements. The resilience benefit of the LVR policy arises chiefly from its impact in mitigating the decline in house prices & economic activity during a stress scenario (discussed below).
“LVRs are more effective than capital & liquidity instruments at moderating the amplitude of the financial cycle during the upturn because they constrain lending volumes directly. Several studies have estimated that LVR policy can reduce house price inflation in New Zealand by approximately 3% and mortgage lending by 1%. By lowering the degree of house price over-valuation, this may help to reduce the scale of a severe downturn in the housing market. However, quantifying these impacts is uncertain. And one of the lessons of LVR policy since 2013 is that the effect of each tightening on the rate of housing demand growth is likely to be moderate & temporary (typically 6-12 months).
“LVR policy can also dampen the amplitude of the financial cycle by limiting the number of distressed house sales & the level of household indebtedness. Absent these impacts, the financial cycle can amplify the vulnerability of the economy to negative shocks through falling house prices, reduced consumption & greater defaults on business loans, resulting in tighter credit conditions. Quantifying the effects of LVR policy on these transmission channels is difficult. Reserve Bank estimates suggest that (a) LVR policy may have reduced stressed mortgage defaults by approximately 10%, and (b) without LVR policy, household debt:income ratios would sit at 172%, compared to the actual level of 164%.”
Part 1: LVR policy reviewed, recommendations awaited
Link, review paper released 22 May 2019: Macroprudential policy framework: Mitigating boom-bust cycles in the financial system
Review of the Reserve Bank’s loan:value ratio policy
Macroprudential policy framework: Mitigating boom-bust cycles in the financial system
Analytical note: Have the LVR restrictions improved the resilience of the banking system?
Phase 2 of the Reserve Bank Act review
Attribution: Reserve Bank paper, LinkedIn.