In a speech to the Auckland Chamber of Commerce today, English said that over the next few weeks, the Reserve Bank will consult on its proposals to use more tools to help ensure financial stability.

Under these proposals, the Reserve Bank will have a greater ability to influence the amount of lending done by banks and other financial institutions.

This might include requiring lenders to: Hold additional capital on their balance sheet 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 the impact of short-term funding shortages, and; restrict high loan-to-value ratio lending in the housing sector.

“They will not be the answer to all problems created by excessive credit cycles,” English said. “But they will certainly help at the margins.” English said he didn't want to “prejudge” the consultation process today.

However, he said the Government is considering formalising the use of these tools to “avoid a strong upswing in asset values and any unsustainable growth in borrowing well in excess of economic growth.” He said since the Global Financial Crisis, the Reserve Bank has laid out new requirements to encourage banks to strengthen their balance sheets, in terms of both capital and liquidity buffers.

“After several years of discussion against the background of an international debate on the same issues, the Government will formalise the policy and ensure the decision making process is transparent,” he said. “As I’ve said, it is intended to help manage excesses in credit cycles, as occurred in the lead up to the Global Financial Crisis."

The Reserve Bank will be taking the proposals to the public for consultation next month.