New Zealand central bank given new tools to fight economic bubbles

2013-05-16 03:45:46 GMT2013-05-16 11:45:46(Beijing Time)  Xinhua English

WELLINGTON, May 16 (Xinhua) -- The New Zealand government and the Reserve Bank of New Zealand (RBNZ) have agreed on new macro- prudential tools targeting potential economic bubbles such as the country's overheating housing market.

Finance Minister Bill English and RBNZ Governor Graeme Wheeler have signed a memorandum of understanding on measures to protect the economy and financial system from boom and bust cycles.

"Excessive credit growth, followed by a bust, was at the core of the global financial crisis," English said in a statement on the government's annual Budget Thursday.

"While New Zealand's banking system avoided the upheaval that engulfed some other countries, the government has agreed that the Reserve Bank should have extra measures available to reduce New Zealand's vulnerability to such cycles."

The memorandum provided four new measures in addition to existing increased capital and liquidity requirements, which would require banks to:

-- hold additional capital on their balance sheets as a buffer during an economy-wide credit boom;

-- hold additional capital against loans in specific sectors if risks emerge in those sectors;

-- adjust their funding ratios to use more stable sources of funding to avoid short-term funding shortages;

-- apply quantitative restrictions on the share of high loan-to- value ratio loans in the housing sector.

"These extra tools, if it becomes necessary for the Reserve Bank to apply them, will help to promote financial stability," English said.

"They will increase the resilience of the financial system during periods of rapid credit growth or easy liquidity conditions, and help to dampen excessive growth in credit and asset prices."

However, the official cash rate would remain the primary monetary policy instrument.

An International Monetary Fund report on Wednesday said New Zealand's housing market could be overvalued by up to 25 percent.

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