The Reserve Bank has issued a Consultation Paper setting out its proposals for macro-prudential instruments designed to meet the objective of promoting greater financial system stability.

The proposals are as follows:

  • a countercyclical capital buffer (CCB), which aims to provide the banking system with additional high quality capital in periods of credit downturn (a 2012 discussion document discussed the CCB);
  • adjustments to the minimum core funding ratio (CFR), which requires a greater use of 'stable' funding sources by banks;
  • adjustments to sectoral capital requirements (SCR) designed to target particular sectors in which risk is accumulating and posing a threat to the overall financial system; and
  • temporary restrictions on high loan-to-value ratio residential mortgage lending.

The Consultation Paper seeks submitter's views surrounding the latter three proposals, including:

  • the use of adjustments to the CFR, SCR and restrictions on high loan-to-value ratio residential mortgage lending;
  • how banks' lending, funding, pricing and balance sheet management are likely to adjust in response to changes in the CFR, or to changes in aggregate or SCR;
  • any operational considerations relating to the imposition of SCR via a risk weight overlay versus a capital add-on;
  • the likely impact of restrictions on high loan-to-value ratio mortgage lending;
  • the proposed decision making framework for macro-prudential policy; and
  • the proposed notice periods for the CFR, SCR and restrictions on high loan-to-value ratio lending.

Submissions on the Consultation Paper are due by 10 April 2013. For further information and to read the full Consultation Paper, see here.