Reserve Bank of New Zealand Macroprudential Policy Framework May 2026

Macroprudential
Policy Framework
Stephen Martin, Chris McDonald and Shaun Markham May 2026

Macroprudential Policy Framework 1
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Macroprudential Policy Framework 2
Contents
Non-technical summary_______________________________________________________________________ 3 Borrower-based measures address systemic risks related to the housing market 3 Capital and liquidity tools target banks’ balance sheets 4 We will review policy settings at least annually 4

1. Introduction_______________________________________________________________________________ 5
2. Why we have macroprudential policy____________________________________________________ 5
3. Legal and regulatory framework _________________________________________________________ 9
4. Policy tools_______________________________________________________________________________ 10
   Loan-to-value ratio restrictions 10
   Debt-to-income restrictions 13
   Counter-cyclical capital buffer 17
   Sectoral capital requirement 18
   Adjustments to the core funding ratio 18
5. Interactions between policy tools _______________________________________________________ 19
   Interactions between LVR and DTI restrictions 19 Interactions with the CCyB 20
6. Decision-making process ________________________________________________________________20
   We intend to review macroprudential policy settings at least once a year 21 A risk assessment is a key part of our annual reviews 21 We would consider tightening settings as risks increase 24 Easing the CCyB is our preferred response to an economic downturn 25
7. Consultation and stakeholder engagement_____________________________________________27
   Public consultation on macroprudential policy 27 Regulatory impact assessment 28 Engagement with the Minister of Finance and Treasury 28
8. Review and evaluation___________________________________________________________________29
   Reviewing the scope of macroprudential policy 29 Reviewing the long-run assumptions for DTI and LVR settings 29 Reviewing this document 30
   Appendix A: Legal and regulatory framework prior to the DTA coming into effect________32
   Appendix B: International approaches to macroprudential policy__________________________33
   Borrower-based measures 33
   Capital and liquidity-based tools 34
   Appendix C: Macroprudential policy settings in different parts of the cycle _______________35

Macroprudential Policy Framework 3
Non-technical summary
This document outlines how the Reserve Bank of New Zealand – Te Pūtea Matua (the Reserve Bank or we) uses macroprudential policy to mitigate systemic risk and support financial stability. In this context, systemic risk relates to disruptions that affect all lenders, such as an economic downturn, rather than risks limited to individual institutions. Macroprudential policy refers to tools we use to target these system-wide risks. This complements microprudential policy, which focuses on the soundness of individual deposit takers, for example by ensuring they have sufficient capital and liquidity to withstand adverse events. Macroprudential policy is designed to mitigate negative feedback loops between the financial system and the economy. It contains excessive risk-taking by lenders during boom periods to improve the resilience of borrowers in an economic downturn. It also mitigates the risk that deposit takers reduce lending in an economic downturn, which could exacerbate the downturn by reducing household and business spending. Without macroprudential policy, it is more likely that banks’ lending behaviour exacerbates downturns in the economy, like we saw in the 2007-09 global financial crisis. Borrower-based measures address systemic risks related to the housing market Borrower-based measures include loan-to-value ratio (LVR) and debt-to-income (DTI) restrictions. LVR restrictions limit how much residential mortgage lending banks can provide to borrowers whose loan is large relative to the value of the property(s) that the loan is secured on. This essentially requires most borrowers to have a minimum deposit or level of equity. LVR restrictions reduce the potential losses for lenders and borrowers by reducing the extent of negative equity faced by borrowers in a housing market downturn. They are designed to be at their long-run settings most of the time. 1 However, we expect to temporarily tighten settings from this long-run level in situations when systemic risk increases materially. Similarly, DTI restrictions limit mortgage lending with high DTI ratios. By linking borrowing capacity to income, these restrictions reduce the probability that borrowers default on their loans in a period of stress. They are designed to act like guardrails against excessive risk-taking, meaning they only constrain lending in housing booms and periods of low interest rates. As such, we do not intend to adjust DTI settings regularly. However, we may consider whether the settings remain appropriate from time to time. These measures support financial stability by reducing the number of loans in default and, relatedly, the scale of losses faced by borrowers and lenders, particularly in the face of an adverse event. In turn, this also helps to reduce the risk of a downturn in the broader economy. ____________ 1 These long-run settings aim to support financial stability by building household resilience over time without unduly restricting access to credit.

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Our LVR and DTI restrictions allow for a percentage of lending above set thresholds, giving lenders discretion to offer some high-LVR or high-DTI loans to otherwise creditworthy borrowers. We do not regulate how lenders use this discretion when making individual loans. Capital and liquidity tools target banks’ balance sheets These macroprudential tools include the counter-cyclical capital buffer (CCyB), sectoral capital requirement (SCR), and adjustments to the core funding ratio (CFR) requirement. They involve adjusting requirements for banks through the financial cycle to support financial stability. The CCyB allows us to temporarily reduce banks’ capital requirements in a significant economic downturn to prevent these requirements from unduly constraining access to credit. Similarly, we could temporarily lower the CFR requirement when wholesale funding markets tighten to reduce the risk of a broader reduction in access to credit. By contrast, we could use the SCR to increase capital buffers for loans within a specific sector if there is a build-up of systemic risk in that sector. We will review policy settings at least annually Annual reviews will assess whether housing-related risks, such as unsustainably high house prices and rising shares of high-risk lending (as a percentage of total lending), warrant tighter policy settings. Our focus in these regular reviews will tend to be on LVR settings. In periods of systemic stress, we may need to run ad hoc reviews as conditions worsen rather than waiting for our annual review. Reviews of long-run settings will be less frequent (around every 3 to 5 years) and will consider structural changes in the economy, behavioural responses to policies, and evidence of unintended consequences. We intend to consult publicly when considering new tools or a material tightening of settings. However, we generally will not consult on urgent changes to settings for existing tools and non￾urgent easing of settings. While decision making on macroprudential policies is delegated to the Financial Policy Committee (FPC) by the Reserve Bank Board, we will continue to inform the Minister of Finance and Treasury prior to macroprudential policy announcements.

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1. Introduction
   As New Zealand’s prudential regulator, the Reserve Bank is responsible for protecting and promoting the stability of New Zealand’s financial system. This supports our overarching statutory purpose of promoting the prosperity and well-being of New Zealanders and contributing to a sustainable and productive economy. Our macroprudential policy framework is designed to promote financial stability by mitigating systemic risks that emerge through the financial cycle to lessen the severity of downturns when they occur. Decisions to implement, remove, or change the calibration of macroprudential tools are made by the Reserve Bank’s FPC.2 The development and implementation of macroprudential policy has become much more widespread since the global financial crisis. This period showed that microprudential policy alone was not sufficient to promote and protect financial stability as it fails to account for risks that build up over financial cycles. It also does not account for potential negative feedback loops that can emerge from interactions between the financial system and the broader economy, which can amplify downturns. Macroprudential policy is now commonly used internationally to manage risks to the financial system as a whole, with growing evidence of its effectiveness at improving financial stability over time (see Ampudia, et al., 2021). This framework document sets out the principles and processes that underpin our use of macroprudential tools and how they transmit to financial stability. The purpose of this document is to provide an introductory guide to macroprudential policy and improve public understanding of our macroprudential policy decision making. It does not detail our full understanding of macroprudential policy or express a view that members of the FPC must adhere to when making decisions on macroprudential policy matters. We first published the macroprudential policy framework document in 2019. 3 This update reflects several changes since then to ensure that the framework document remains accurate and effectively serves its purposes.4 We will continue to update the framework document periodically to reflect any further changes to the legislative framework or our approach to macroprudential policy.
2. Why we have macroprudential policy
   Macroprudential policy targets systemic risks that impact the stability of the financial system as a whole - for example, this includes risks such as a major housing market downturn. This complements our microprudential policy, which focuses on the risks to, and resilience of, individual deposit takers – for example, by requiring deposit takers to have processes in place to help them to respond to adverse events and regulatory capital to absorb potential losses. ____________ 2 See Financial Policy Committee - Reserve Bank of New Zealand - Te Pūtea Matua 3 See Macroprudential policy framework 4 These changes include the transition to a new regulatory framework under the Deposit Takers Act 2023, the introduction of new macroprudential instruments (for example, debt-to-income restrictions), and the shift in our approach toward maintaining long-run settings through the financial cycle while retaining the flexibility to adjust settings in response to cyclical systemic risks.

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Microprudential policy is also not designed to focus on the potential negative feedback loops that can emerge from interactions between entities, the financial system, and the broader economy. For example, deposit takers may respond to a downturn in a way which generates more losses and a further contraction in economic activity, triggering a self-reinforcing cycle (this dynamic is discussed more below). Macroprudential policy can mitigate these potential negative feedback loops by enhancing borrower resilience and promoting more stable credit conditions, therefore reducing the risk that the financial system amplifies a severe downturn in the real economy. Table 1 summarises how macroprudential policy complements microprudential policy through the financial cycle.
Table 1: Role of macroprudential policy and microprudential policy
Purpose Examples of tools
Transmission to financial stability
Impact on the economy
Macroprudential policy
Manage system-wide risks to financial stability Borrower-based measures (LVR and DTI restrictions) Mitigates the likelihood and potential magnitude of financial crises Reduces the likelihood of the financial system amplifying an economic Capital and downturn Liquidity tools (CCyB, SCR, CFR) Microprudential policy Ensure the safety and soundness of individual deposit takers Capital requirements Reduces the risk of bank failure and minimises the impacts on the broader financial system in the event of failure Maintains confidence in the banking system so credit is accessible for households and businesses Liquidity policy Disclosure requirements The build-up of systemic risk can vary over time, which relates to the ‘boom-bust’ nature of financial cycles. During ‘booms’, credit growth and asset prices can become unsustainable. This increases the risk of a ‘bust’, potentially resulting in significant losses for banks, businesses, and households. During a bust, banks’ ability and willingness to continue lending to the economy can reduce sharply, potentially leading to negative feedback loops where the downturn in the financial cycle and the slowdown in the economy become mutually reinforcing. One of the reasons that boom-bust cycles can develop is because the financial system is procyclical. Rising asset prices and narrowing credit spreads can lead to borrowers and lenders underestimating risks in an upturn, encouraging looser lending standards and more lending. This dynamic can continue to amplify the economic and financial cycle until a downturn occurs and the process works in reverse. A slowdown in economic activity can result in falling asset prices, increasing defaults and rising risk perceptions, leading to banks restricting their lending to the economy. The reduction in credit availability can cause further declines in economic activity and asset prices, creating negative feedback loops. This dynamic can have significant and lasting impacts on the economy, partly determined by the prudence of bank lending standards before the systemic stress occurs.

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Evidence shows there is a strong relationship between banks’ lending standards during the good times and the sensitivity of household consumption to financial stress. Floden (2014) finds that countries with high household DTIs in 2007 suffered a larger reduction in consumption between 2007 and 2012, after controlling for other factors. Research on New Zealand data has similarly shown household leverage reinforces the housing wealth effect in a housing bust (de Roiste, Fasianos, Kirkby, & Yao, 2019). The housing market is the main source of potential systemic risk to New Zealand’s financial system. Residential mortgage lending comprises more than half of banks’ assets. 5 While we do not target house prices as an end goal of macroprudential policy, they are one of the key indicators we use to inform policy settings. For example, strong house price growth and household credit growth are both linked to the likelihood and severity of housing market downturns (Thornley, 2016). If house prices rise significantly above levels implied by economic fundamentals, the risk of a sharp correction in prices also increases. This could potentially result in large losses for banks, households cutting back spending, and adverse impacts on the wider economy. As a result, macroprudential policies that aim to mitigate systemic risk related to the housing market may have the intermediate objective of constraining excessive mortgage lending and consequently slowing house price growth.
Figure 1 illustrates how losses in the housing market can also cause banks to reduce lending and
trigger a negative feedback loop that can further amplify an economic downturn.
Figure 1: Feedback effects between housing market downturns and the economy
When macroprudential policy was introduced, we expected these measures to be in place temporarily while risks were elevated and removed when risks abated. However, our approach to setting macroprudential policy has evolved over time. While we still intend to adjust macroprudential policy settings in response to changes in systemic risk, we now have long-run settings for our macroprudential tools that we expect will remain in place most of the time. These ____________ 5 Residential mortgage lending made up 51% of bank assets in December 2025. House prices fall Households reduce spending Economic activity decreases Unemployment rises Mortgage defaults and distressed house sales increase Banks incur losses Reduced lending

Macroprudential Policy Framework 8 long-run settings apply when risks are not accumulating rapidly and balance the benefits of promoting resilience against the potential costs from restricting access to credit. We still intend to tighten some policy settings when risks are elevated to promote a higher level of resilience when it is needed most. Tightening macroprudential policy settings in a boom period can lean against the procyclical nature of the financial system and dampen the amplitude of financial cycles. Macroprudential policy also helps build resilience so that, when a bust does happen, the financial system is less likely to amplify the downturn. These benefits for financial stability are generally only observable over the longer-term and when systemic risk crystallises. 6
Table 2 notes some reasons why systemic risk can vary over the financial cycle and how
macroprudential policy can mitigate these risks to support financial system resilience.
Table 2: How macroprudential policy addresses drivers of systemic risk over the cycle
Driver of systemic risk How macroprudential policy supports resilience Procyclicality in banks’ risk appetite and lending policies Macroprudential policy can lean against the procyclical nature of the financial system by constraining risk taking in an upturn and limiting risk aversion in a downturn. This supports a more stable supply of credit through the cycle and reduces the likelihood that changes in borrower and lender behaviour amplify economic cycles. Increasing borrower leverage at low interest rates By linking credit availability to creditworthiness, macroprudential policy helps to prevent excessive increases in household leverage when borrowing conditions are favourable. This reduces the risk that high debt levels make households and the broader financial system vulnerable to shocks. Increasing borrowing due to rising house prices Macroprudential policy helps ensure that credit growth remains sustainable even when rising asset prices increase borrowing capacity. It reduces the risk of the household sector accumulating debt at a level that leaves borrowers vulnerable to future income or asset price adjustments, improving borrower resilience. Elevated probability of a house price correction During periods where the risk of a correction increases, macroprudential policy can help prevent the accumulation of highly vulnerable lending. This reduces the potential severity of a systemic stress should house prices fall. Borrower-based macroprudential tools also lessen the size of a potential house price fall, further mitigating financial stability risks. Procyclicality in banks’ access to funding markets Macroprudential policy settings can be loosened when banks’ access to funding markets tightens, such as when funding becomes more expensive or less readily available. This reduces ____________ 6 For example, the New Zealand financial system has been resilient to the rapid growth and then decline in house prices since the COVID-19 pandemic. In part, this is due to LVR requirements, which have improved borrowers’ capacity to absorb losses without falling into negative equity since they were introduced in 2013. See Financial Stability Report Nov 2024

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Driver of systemic risk How macroprudential policy supports resilience the risk of a widespread reduction in credit availability during periods of systemic stress.
3. Legal and regulatory framework
Macroprudential policy is one way in which the Reserve Bank uses its statutory powers to meet statutory objectives and purposes. In December 2028, once the relevant provisions of the Deposit Takers Act 2023 (DTA) are in effect, macroprudential policy will be applied under the DTA. 7 The DTA creates a single, modern regulatory regime for all financial institutions in the business of ‘borrowing and lending money’ in New Zealand. This will include banks and non-bank deposit takers. 8 The Deposit Takers Standards (the standards) will replace our existing prudential requirements that are currently contained in several different sets of documents (such as Banking Supervision documents and Banking Prudential Requirements) and given effect through banks’ conditions of registration. 9 The standards will set the rules that deposit takers must meet and will be in the form of secondary legislation. Standards may be issued if we are satisfied that they are necessary or desirable to achieve one or more of the purposes of the DTA, after having regard to a range of statutory principles and the Financial Policy Remit issued by the Minister of Finance. 10 Whilst the DTA does not explicitly refer to macroprudential policy, it allows us to use various prudential tools to achieve macroprudential policy objectives – for instance, to avoid or mitigate adverse effects of the risks to the stability of the financial system and risks from the financial system that may damage the broader economy. 11 The various macroprudential policy tools will be set out in a range of standards:
12
 The Lending Standard provides for LVR and DTI restrictions (that is, borrower-based measures).13  The Capital Standard provides for the CCyB and SCR (that is, capital-based measures).  The Liquidity Standard provides for adjustments to the CFR (that is, liquidity-based measures). These tools are discussed in more detail in the next section. ____________ 7 Prior to the DTA coming into full effect, macroprudential policy is applied under the Banking (Prudential Supervision) Act
1989. See Appendix A for more detail.
8 The DTA received Royal Assent on 6 July 2023. It will replace the Banking (Prudential Supervision) Act 1989 and the Non-bank Deposit Takers Act 2013. For an overview of the DTA, see Overview of the Deposit Takers Act - Reserve Bank of New Zealand

• Te Pūtea Matua.
  9 See Standard conditions of registration - Reserve Bank of New Zealand - Te Pūtea Matua 10 See ss 4 and 72 of the Deposit Takers Act 2023 and s 49 of the Reserve Bank of New Zealand Act 2021. See also Our Financial Policy Remit. 11 See s 3(2)(d) of the Deposit Takers Act 2023. 12 Standards are currently due to come into effect in late 2028. 13 As per section 83 of the Deposit Takers Act 2023, regulations outline the class or classes of lending that the Lending Standard may apply to (such as residential mortgage lending, commercial property and rural lending).

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Scope
Under the DTA’s Proportionality Framework, the calibration of prudential requirements on locally incorporated deposit takers will take into account their relative size and complexity, placing them into three groups.14 At this stage, we intend to apply our macroprudential policy tools only to Group 1 and 2 deposit takers. None of the tools will apply to Group 3 deposit takers as they are small and do not currently pose systemic risk to financial stability. However, we intend to monitor this and will change our approach as needed (this is discussed in the Review and Evaluation section). We do not intend to apply our macroprudential policy tools to branches of overseas deposit takers given that the business they conduct in New Zealand will be restricted to corporate and institutional clients. This means that branches of overseas deposit takers will not be involved in residential mortgage lending, which is the main source of potential systemic risk to New Zealand’s financial system. Moreover, branches are not subject to quantitative capital or liquidity requirements in New Zealand. It is noted that non-deposit taking lenders are generally outside the scope of prudential requirements. However, the DTA enables us to apply the Lending Standard to these lenders, subject to approval from the Minister of Finance. 15 We do not currently intend to do this but will monitor the lending of non-deposit taking lenders.
4. Policy tools
We have borrower-based, capital, and liquidity tools in our macroprudential policy toolkit, where each tool targets different aspects of systemic risk to ultimately support financial stability.  Borrower-based measures, which include LVR and DTI restrictions, specifically target a build-up of systemic risk related to the housing market. Over time, borrower-based measures reduce the proportion of highly indebted mortgage borrowers.  Capital and liquidity tools, which include the CCyB, SCR, and adjustments to the CFR, support financial stability through banks’ balance sheets. These tools allow us to ease certain requirements for banks in a period of systemic stress to promote a more stable supply of credit and support economic activity. If necessary, we can add new macroprudential policy tools to our toolkit to address emerging systemic risk. Any additional tools would be developed in consultation with the Treasury and the Minister of Finance. Loan-to-value ratio restrictions In simple terms, a borrower’s LVR measures how big a loan is relative to the size of the collateral used to secure that loan. Our LVR restrictions limit the amount mortgage lending deposit takers can provide to borrowers whose loan is large relative to the value of the residential property(s) ____________ 14 Licensed deposit takers will be allocated into groups based on size to support the consistent application of the requirements in each DTA standard to similar deposit takers. Group 1 deposit takers are those with total assets of $100 billion or more (currently ANZ, ASB, BNZ, and Westpac). Group 2 includes deposit takers with total assets of $2 billion or more, but less than $100 billion, and Group 3 includes deposit takers with total assets of less than $2 billion. See Proportionality Framework for developing standards under the Deposit Takers Act 15 As per section 84 of the DTA. See Deposit Takers Act 2023 No 35 (as at 31 July 2025), Public Act – New Zealand Legislation

Macroprudential Policy Framework 11 that the loan is secured on. This means that most mortgage borrowers are essentially required to have a minimum deposit, or a minimum level of equity in an existing property. We first introduced LVR restrictions in 2013. Transmission to financial stability The LVR tool is mainly aimed at reducing potential losses when borrowers default on their mortgage, reducing the risk of negative equity. This improves the resilience of the financial system by limiting the impacts of a downturn in house prices. As house prices fall in a downturn, households with large loans relative to the value of the property are at risk of falling into negative equity and may not be able to fully repay their loans if they default on their mortgages. Additionally, the magnitude of any negative equity in a housing market downturn will be larger for loans with higher initial LVRs. This can cause large losses for deposit takers and adversely impact the broader economy through a reduction in credit availability and potential negative feedback loops. There are two channels through which LVR restrictions target housing-related systemic risks to improve financial stability. Firstly, by restricting the flow of new high-LVR lending, the stock of high-LVR loans also decreases over time. This reduces both the likelihood that borrowers fall into negative equity and the magnitude of potential negative equity for a given fall in house prices. Therefore, lower-LVR mortgage lending on average reduces expected mortgage losses for deposit takers in a housing market downturn. LVR restrictions have been effective at reducing the share of high-LVR mortgage lending since they were introduced. However, it took several years for the full effect of the policy to be realised on the overall stock of mortgage lending. Figure 2 below shows that, following the implementation of LVR restrictions in 2013, the share of high-LVR mortgage lending in the overall stock fell for around four years before stabilising at a lower level. The second way LVR restrictions improve financial stability is by mitigating the potential magnitude of a house price correction. Borrowers with more equity have more options to manage debt repayments (for example, making interest-only payments). In doing this, LVR restrictions reduce the likelihood of widespread distressed house sales. In turn, this can help to limit the potential magnitude of a fall in house prices, reducing mortgage losses in the event of default and mitigating negative feedback loops. At the margin, LVR restrictions can also limit the rise in house prices during a boom. However, we tend to put less emphasis on this when considering policy settings because the impact on overall housing demand tends to be small (Price, 2014; Bloor & Lu, 2019). 16 ____________ 16 Bloor and Lu (2019) also demonstrate that the LVR policy has improved the resilience of the banking system to a severe downturn in house prices. Since being introduced in
2013, LVR restrictions have reduced the scale of mortgage defaults and credit losses that would occur in a housing downturn, due to a reduction in risky loans on bank balance sheets and the mitigation of potential house price declines. However, this was partly offset by lower average risk weights for mortgages, meaning banks needed less capital.

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Figure 2: Stock and flow of high-LVR mortgage lending
Calibration
LVR restrictions for residential mortgage lending are set with a ‘threshold’ and a ‘speed limit’. The threshold specifies the LVR where loans are considered high-LVR. The speed limit restricts the proportion of a banks’ new residential mortgage lending that can have a high LVR outside of certain exemptions (see Box A). There are different LVR settings for owner-occupier and investor loans. Investor loans typically have a lower threshold and lower speed limit for high-LVR lending compared to owner-occupier loans. Tighter restrictions for investors reflect the higher risks associated with this type of lending.17 Investor behaviour is more likely to amplify financial and housing market cycles. Compared to owner-occupiers, investors are more likely to respond to a house price downturn by selling some of their investment properties to reduce leverage. This increases the risk of creating widespread distressed house sales, which could further increase the number of investors that fall into negative equity and increase potential losses for banks. Tighter LVR restrictions for investors means there is a lower proportion of high-LVR investor loans, helping to mitigate this risk. LVR restrictions may also become less binding on investors over time as these borrowers can leverage existing equity to acquire more properties, potentially amplifying house price cycles. Tighter LVR restrictions for investors limit highly leveraged borrowing and may help to dampen house price cycles to reduce the risk of a substantial downturn over time. Maintaining LVR restrictions through the financial cycle helps to mitigate procyclicality and borrower vulnerability to house price declines. Therefore, we have a long-run setting for LVR ____________ 17 Initially, LVR restrictions were the same for investors and owner-occupiers. We first introduced tighter restrictions for investors in Auckland in 2015 and extended these to the rest of the country. in 2016. See Timeline for loan-to-value ratio restrictions - Reserve Bank of New Zealand - Te Pūtea Matua for a full timeline of our decisions and consultations related to LVR restrictions.

Macroprudential Policy Framework 13 restrictions, which is the default level we expect them to be set at most of the time. The long-run high-LVR threshold is currently set at 80% for owner-occupiers and 70% for investors, with speed limits of 25% for owner-occupiers and 10% for investors.18 These settings aim to support financial stability by building household resilience over time without unduly restricting access to credit. While long-run LVR settings generally improve borrower resilience over time, we may still tighten (or possibly loosen) settings from the long-run level in some situations to manage systemic risk. When the Lending Standard comes into force, it will specify a relatively wide range of possible settings for the high-LVR threshold and lending speed limit, giving us flexibility to respond to evolving financial stability risks.19 If it was necessary to adjust LVR restrictions, we would typically look to move them back to the long-run level once risks had normalised. The Decision-Making Process section discusses how we assess risks that may motivate a change in policy settings. Debt-to-income restrictions DTI restrictions limit the amount of residential mortgage lending that banks can provide to borrowers with a DTI above a certain threshold. A borrower’s DTI is calculated by dividing their total debt by total annual income, subject to certain exclusions and assumptions specified by the Reserve Bank. We introduced DTI restrictions in 2024. Transmission to financial stability LVR restrictions target one aspect of systemic risk related to the housing market. However, another key component is a borrower’s capacity to service a loan, which affects their probability of default. DTI restrictions address this second dimension of housing-related systemic risk, complementing LVR restrictions. In a boom, borrowers could contribute to the cyclicality of the financial cycle by borrowing large amounts relative to their income and bidding up house prices. Borrowers can also contribute to cyclicality in a downturn if they come under financial stress and default on their mortgage payments, potentially forcing them to sell. Systemic ‘waves’ of mortgage defaults could lead to many borrowers having to sell within a short period of time, forcing sales at ‘fire sale’ prices. This can result in significant losses to deposit takers and a reduction in credit availability, creating further economic and financial instability through negative feedback loops. 20 DTI restrictions limit the amount of high-DTI mortgage lending by banks which, over time, reduces the number of highly indebted households. Lower debt levels relative to income supports household resilience in a downturn and therefore reduces the probability that borrowers will face stress or default on their mortgages. This reduces the probability of a systemic wave of mortgage defaults in a downturn, supporting financial and economic stability. DTI restrictions can also help to moderate the
cyclicality of the housing market. The restrictions tie mortgage borrowing capacity directly to borrower income, which fluctuate much less than house prices on average. Limits on high-DTI lending can help to moderate house price growth during booms, reducing both the probability and potential magnitude of housing market corrections. This reduces the probability of negative feedback effects from a housing market downturn on financial markets and the broader economy. ____________ 18 See Our approach to macroprudential policy through the cycle 19 See DTA Non-core Standards - Summary of Submissions and Policy Decisions 20 Shleifer and Vishny (2011) describe the link between financial asset fire sales, financial crises, and the macroeconomy.

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Calibration
Like LVR restrictions, DTI restrictions are also set with a threshold and speed limit. The threshold specifies the DTI ratio where loans are considered high-DTI. The speed limit restricts the proportion of a banks’ new residential mortgage lending that can have a high DTI ratio. DTI restrictions apply to both owner-occupiers and investors, but not necessarily at the same level for these borrower types. Setting different DTI restrictions allows us to calibrate them proportionately to the risks that each group represent. For owner-occupiers, DTI restrictions lower the probability of borrowers entering financial stress and defaulting on their mortgages, therefore reducing the probability of a systemic wave of mortgage defaults. In a downturn, owner-occupiers are unlikely to sell their property as it is their primary residence and are more likely to reduce spending and potentially default on their mortgages as their financial situation deteriorates. This dynamic becomes more pronounced as the downturn persists and unemployment rises and incomes fall for some borrowers. For investors, DTI restrictions aim to reduce cyclicality in the housing market that can be created if investors respond to a downturn by selling some of their investment properties, further pushing house prices down. However, financial stress also generally occurs at a higher level for investors compared to owner-occupiers. Investors tend to have more income available to service loans as they receive rental income in addition to labour income, with a smaller share of this additional income needed to cover essential expenses. Therefore, investors are typically better placed to service high-DTI loans, which means that the high-DTI threshold for investors can be set higher relative to owner-occupiers to achieve similar financial stability benefits. DTI restrictions are counter-cyclical in nature as the proportion of high-DTI lending tends to increase in boom periods, such as when house prices are rising and low interest rates support borrowing capacity (and vice versa). This means that DTI restrictions can be set at a level where they constrain lending only when conditions mean high-DTI lending would normally be elevated. They would have limited impact at other times, without needing to be adjusted. This is known as the ‘guardrail’ approach. The figure below illustrates how DTI restrictions act as guardrails. When DTI restrictions were introduced in 2024, the threshold was set at 6 for owner-occupiers and 7 for investors, with a 20% speed limit for both borrower types. These are also the long-run DTI settings. DTI restrictions were not binding at the time as the housing market was relatively subdued. However, they would have been binding during the house price boom in 2021, had they been in place then.

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Figure 3: High-DTI lending by borrower type (as a percentage of total lending to each borrower
type)
We intend to keep DTI restrictions in place through the financial cycle, rather than waiting until there is an increase in risky lending to implement them. This means that the restrictions are more likely to be in place when they are needed, given the time they would otherwise take to implement as banks adjusted their systems. This is why we activated DTI restrictions in 2024 when housing market risks were not particularly elevated. However, these restrictions need to be set at an appropriate level to act effectively as guardrails through the cycle. DTI settings that are too loose are unlikely to sufficiently bind in a housing boom and would not achieve our policy objectives. On the other hand, settings that are too tight would also be more binding in normal market conditions, which is not the intention of the policy, and could unduly limit borrowers’ access to credit. We do not intend to regularly adjust DTI restrictions over the financial cycle, but we may consider whether DTI settings remain appropriate from time to time (see Decision-Making Process
section).21

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21 The Lending Standard will also specify a range of possible settings for the high-DTI threshold and lending speed limit when it comes into force. See DTA Non-core Standards - Summary of Submissions and Policy Decisions

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Box A: Using speed limits and exemptions to reduce unintended impacts LVR and DTI restrictions can have unintended effects that need to be managed.

• Allocative efficiency of the financial system: They can restrict lending to creditworthy
  borrowers. For example, a person who can comfortably service a loan but has little equity could be affected by LVR restrictions (some first home buyers may be in this position). Conversely, a person with lots of equity but little income could be affected by DTI restrictions.
• Housing supply: When we first introduced LVR restrictions, and before we implemented
  exemptions, banks raised the impact of LVR restrictions on housing supply as a concern given the important role of bank funding in the construction process. Responsive housing supply can help to ease house price pressures and support longer-term financial stability.
• Competition between banks: LVR and DTI restrictions can also impact banks’ ability to
  compete on certain dimensions of risk.
  We have designed our LVR and DTI restrictions with speed limits and exemptions to minimise these effects. Speed limits permit a percentage of lending above the set thresholds. Banks have full discretion in choosing how to allocate lending above the thresholds, taking into account their own risk management, lending policies and business strategy. Exemptions apply to some types of lending that we do not subject to LVR or DTI restrictions to. 22 These are designed to limit unintended consequences on specific economic and social objectives without compromising financial stability. For example, to support housing supply loans for constructing a new home or for purchasing a newly built home that meets certain criteria are exempt. To support competition between banks, loans that are refinanced from another lender are also exempt. We continually monitor a range of indicators that help us measure unintended effects. For example, we look at first home buyer shares of new lending and housing transactions, home ownership rates, and the market share of non-bank lenders who are not restricted by our macroprudential tools. Our view is that speed limits and exemptions have largely mitigated the impacts of LVR restrictions on first home buyers. Banks have tended to use a relatively large share of their high-LVR speed limit for lending to first home buyers. This has allowed many first home buyers to borrow with less than 20% deposits (McDonald, 2025). There are also several exemptions that support first home buyers, such as for Kāinga Ora's First Home Loans scheme. ____________ 22 See BS19 - LVR policy for a full list of LVR exemptions. The same exemptions also apply to DTI restrictions, except for combined collateral.

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Counter-cyclical capital buffer
The CCyB is a capital buffer that forms part of deposit takers’ overall capital requirements. The key difference between the CCyB and other components of the capital stack is that the CCyB is designed to be adjusted during the financial cycle in response to changes in systemic risk. At this stage, it is intended that the CCyB will take effect from December 2028.23 Transmission to financial stability The CCyB is designed to be partly or fully reduced (on a temporary basis) as the financial system enters a period of stress and banks’ capital ratios deteriorate. This reduces the risk of regulatory capital requirements constraining credit availability in a significant economic downturn. For example, when the CCyB is reduced, banks can use this ‘released’ capital to help absorb losses without breaching regulatory capital requirements. This encourages banks to continue lending to creditworthy borrowers without needing to raise additional capital. Therefore, easing the CCyB requirement in a downturn reduces the likelihood of the banking system amplifying the downturn through a broader tightening in credit conditions. Another potential role of the CCyB is to mitigate procyclicality by imposing higher capital requirements when systemic risks are elevated. This helps to build the financial system’s resilience to a future downturn and can help constrain excess credit growth. However, it is unlikely that we would use the CCyB for this purpose given we have more targeted tools to address the main sources of systemic risk in New Zealand. Calibration We will use an ‘early-set’ approach for the CCyB, where the buffer is set before systemic risks begin to emerge. The CCyB will be set at a positive long-run rate during normal times and is only intended to be reduced in periods of systemic stress. The CCyB would then be raised back to the long-run level as soon as is appropriate following the systemic stress event. The next section discusses our processes for deciding to reduce or restore the CCyB in more detail. As part of the 2025 Review of key capital settings, we decided to set the long-run CCyB rate at 1% of risk-weighted assets.24 It is unlikely that we would raise the CCyB above the long-run rate. The early-set approach to the CCyB is important for ensuring the additional capital requirements are in place when risks begin to emerge. It takes time for banks to increase their capital ratios as the CCyB increases, but decisions to reduce the CCyB can come into effect immediately. Requiring banks to quickly increase capital ratios as systemic risk begins to rise could unduly constrain credit availability if banks cannot obtain new capital quickly enough. It could also mean that banks do not have enough time to sufficiently increase their capital buffers before a downturn occurs. Having a positive CCyB in place through the financial cycle increases the likelihood that it is effective at supporting credit availability in a downturn and reduces the risk of
unintended consequences. ____________ 23 Our expectation is that the CCyB will be set at its long-run rate when introduced, though its calibration will ultimately depend on the situation at hand. 24 See 2025 Review of key capital settings decision document and Summary of submissions and policy decisions - 2025 Review of key capital decisions

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Sectoral capital requirement
The SCR is an additional capital buffer that we can apply to specific sectors or segments of sectors where we consider that excessive credit growth is leading to a build-up of systemic risk. The SCR could either be applied through overlays to sectoral risk weights or as an additional capital requirement that is calibrated as a proportion of deposit takers’ risk-weighted assets for a particular sector. It would be removed when sectoral risks normalise, or as the economy enters a downturn. We have not used the SCR to date. Transmission to financial stability The SCR works similarly to the CCyB but targets systemic risks from a specific sector. As with the CCyB, the SCR increases the amount of capital that banks have to absorb losses from a particular sector in a downturn. The benefit of a SCR overlay would be immediate, in contrast to borrower￾based tools that take time to build resilience. In addition, the SCR could make lending to specific sectors relatively less attractive as banks need to hold relatively more capital against these exposures. Banks might decide to moderate their lending to the targeted sector if faced with a higher cost of funding, mitigating the build-up in systemic risk that is coming from excessive credit growth in that sector. Banks could also pass on these higher funding costs to borrowers, helping to reduce demand for credit in the specific sector. Calibration While the SCR is part of our macroprudential toolkit, we have not yet used it, and we do not currently intend to activate it in the future.25 As such, the SCR is currently set at 0%. However, we retain the flexibility to activate the SCR if necessary. We would consult on the use of this instrument before it is implemented. Adjustments to the core funding ratio The CFR imposes a minimum requirement on the percentage of a banks’ overall lending that is funded by retail deposits, long-term wholesale funding or capital. These funding sources are relatively more stable than short-term wholesale funding. A bank’s CFR is calculated by dividing its stable funding by its total lending. Maintaining a strong requirement for stable funding is important for reducing banks’ vulnerability to funding market disruptions and ensuring they can fund their lending on an ongoing basis. Banks are usually required to maintain a CFR of at least 75%. However, this requirement could be adjusted through the financial cycle in response to emerging systemic risks or a deterioration in market conditions. For example, we reduced the CFR requirement between 2020 and 2022 during the period of uncertainty from the COVID-19 pandemic. ____________ 25 When considering the possible use of an SCR, we would first consider whether a change in risk is permanent or temporary. If there is a permanent increase in risk, permanent adjustments to other tools (such as changing baseline risk weights) would be more efficient than implementing SCRs, which are intended to only be used temporarily.

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Transmission to financial stability
When systemic risk is elevated, increasing the CFR could improve financial system resilience by further increasing the stability of bank funding to offset any increase in the risk of a funding market disruption. A higher CFR requirement could also restrain excessive credit growth if banks choose to increase their CFRs by moderating their lending, helping to mitigate procyclicality. Easing the CFR requirement can support financial stability if there is a significant deterioration in external funding market conditions, and there is a risk that banks would otherwise need to reduce lending to continue to meet this requirement. This would support credit availability through the period of systemic stress. The CFR requirement could then be restored to its usual level once funding market conditions had stabilised to rebuild banks’ resilience to disruptions. Calibration Similar to the SCR, we only intend to adjust the CFR in exceptional circumstances, such as during the COVID-19 pandemic. For most of the time, the CFR will be set at 75% as per the Reserve Bank’s prudential liquidity requirements.
5. Interactions between policy tools
Figure 4 summarises the different ways in which LVR restrictions, DTI restrictions and the CCyB
impact financial stability. As these tools target different aspects of systemic risk, we think holistically about how tools work together to best achieve our statutory purposes. International experience suggests that using a combination of tools is more effective than using them individually due to synergies between tools (Lo Duca, et al., 2023)
Figure 4: Macroprudential tools and transmission channels
Interactions between LVR and DTI restrictions
There are separate thresholds and speed limits for each of the LVR and DTI restrictions. For example, if a borrower is above both the LVR and DTI thresholds, the lending counts towards the speed limits for both policies. If the borrower is above the LVR but not the DTI threshold, it will count towards the LVR speed limit but not the DTI speed limit (and vice versa).

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LVR and DTI restrictions typically affect different groups of mortgage borrowers, as lenders are generally reluctant to approve loans that have both a high DTI ratio and a high LVR (McDonald, 2025). High-LVR loans tend to have lower DTI ratios due to stricter affordability assessments. Conversely, high-DTI loans are usually only approved for borrowers with sufficient equity and lower LVRs. Therefore, keeping the restrictions separate provides flexibility to target risks independently through the cycle. LVR and DTI restrictions also complement each other as they tend to bind in different situations. The LVRs of existing homeowners fall as house prices increase causing LVR restrictions to become less binding. In contrast, DTI restrictions link borrowing to incomes which can help to maintain more stable lending conditions even when house prices rise. A benefit of having both DTI and LVR restrictions is that together the tools can be set at a looser level than either tool individually to achieve the same or better financial stability benefits, while also reducing unintended consequences. For example, with only LVR restrictions in place, tighter LVR settings may be needed to also capture higher-risk high-DTI loans. However, these restrictions would also capture some low-DTI loans, which may unduly restrict access to credit for these borrowers. By having DTI restrictions in place as well, high-DTI loans can be restricted directly, allowing for slightly looser LVR settings. We would also expect to tighten LVR settings from their long-run level less often with DTI restrictions in place. The guardrail approach to setting DTI restrictions means they will automatically bind in housing upswings, helping to stabilise credit growth and reducing the need for more frequent adjustments to LVR settings. Interactions with the CCyB The CCyB complements LVR and DTI restrictions by allowing a temporary loosening of capital requirements in economic downturns. LVR and DTI restrictions are more effective at preventing a build-up of systemic risk before a downturn occurs. Easing these restrictions in a downturn to support credit availability could result in additional systemic risk by allowing for a greater proportion of highly indebted borrowers. Instead, easing the CCyB would more directly target the supply of credit, particularly if capital requirements were deemed to be constraining lending. We discuss this further in the Decision-Making Process section.
6. Decision-making process
This section outlines our process for adjusting macroprudential settings, where the exact settings are primarily based on our assessment of the conditions at the time. It explains two types of reviews and what our decisions will be based on for each. This includes:

1. Annual reviews that focus on whether housing-related risks warrant tighter settings
   (particularly for LVR restrictions) than the long-run level.
2. Responding during periods of systemic stress, including how we plan to adjust the CCyB.
   Our less regular and more holistic reviews of the long-run settings for LVR and DTI restrictions are discussed in the Review and Evaluation section.

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We intend to review macroprudential policy settings at least once a year At certain points in the housing cycle, systemic risks associated with new lending can become significant enough to warrant tighter macroprudential policy settings. This was the case in 2021, when the share of riskier lending increased and house prices rose well above our estimates of sustainable levels.26 Our intention is to review policy settings annually. These reviews will assess whether housing￾related risks warrant tighter policy settings. Our focus will tend to be on LVR settings given this is the tool we expect to adjust over time. However, from time to time, we may consider whether DTI settings remain appropriate. 27 If we anticipate a substantial build-up in risks in the near future, tighter LVR settings relative to their long-run level may be warranted. It is unlikely we would change the CCyB year-on-year. It is intended to initially be set at 1% and generally kept at its long-run level through the financial cycle. If there is a significant economic downturn, we would not wait for an annual review to reduce the CCyB if that was the appropriate response. The following section outlines the conditions for this response. However, we could use the annual reviews when returning the CCyB back to its long-run level after the period of systemic stress has abated. In addition to periods of systemic stress, we could do ad hoc reviews (between our usual annual reviews) as needed in periods of rapidly increasing risk. We would monitor risks between reviews via our risk assessments for each Financial Stability Report and our ongoing monitoring of the housing market. For example, we publish a range of financial stability indicators each month on our website. A risk assessment is a key part of our annual reviews We assess four key risks or vulnerabilities in our regular reviews. These are similar to what we published in our macroprudential policy framework in 2019. We place the most weight on the probability of a correction in house prices and the riskiness of new lending. We also assess vulnerabilities amongst existing household borrowers and developments in the resilience of lenders but expect these to rarely warrant changes in settings on their own. Probability of a correction in house prices Tighter macroprudential policy settings (for example, tighter LVR restrictions) may be needed if the likelihood of a large fall in house prices increases. This is to help ensure new borrowers are resilient. The likelihood of a large fall increases as house prices start to increase relative to fundamental indicators, like income and interest rates. A significant fall in house prices has the potential to cause an increased incidence of negative equity and/or a large volume of mortgage defaults and losses for lenders, particularly if coupled with a high level of unemployment. This may happen if house prices fall from well above sustainable levels to what is sustainable. In addition, as
systemic ____________ 26 See Tightening loan-to-value ratio restrictions 27 See Our approach to macroprudential policy through the cycle

Macroprudential Policy Framework 22 stress develops in a downturn, the fall in house prices may be amplified by forced sales. This could drive house prices below what is sustainable for a time.28 Riskiness of new lending Tighter macroprudential settings can be used to contain higher-risk borrowing during housing booms. Strong credit growth accompanied by a higher share of risky lending, perhaps bunched just below high-LVR or high-DTI thresholds, could create a cohort of more vulnerable borrowers. We saw this in 2021 when strong housing demand and low interest rates led to an increase in highly indebted borrowers. These are the borrowers who would be most exposed to rising interest rates, falling house prices and job losses. Easier credit standards during a boom could also lead to a more significant tightening in credit standards and could exacerbate a downturn once it occurs. During downturns, banks can tighten their own lending standards, cutting back their lending to the economy. This can cause further falls in house prices, which would further weigh on consumption and employment. Vulnerabilities amongst indebted households more generally Typically, the risks to existing borrowers decline over time as debt is repaid and equity grows, but this may not always be the case. For example, an extended period of flat house prices and elevated interest rates, like in 2023 and 2024, may mean financial buffers (for example, cash, housing equity and undrawn revolving credit) for existing borrowers do not strengthen over time as has been the case over recent decades. A higher level of vulnerability amongst these existing borrowers would motivate tighter LVR settings than otherwise, at the margin. As part of this assessment, we also consider the current and expected state of the economy and labour market, along with debt servicing costs. A weak economy could make households more vulnerable over time and affect their financial buffers. A significant fall in house price would be more impactful on the economy if borrowers were starting from a relatively more vulnerable position. Resilience of lenders We assess the banking system’s capacity to weather a house price correction and continue to supply credit to the economy. If banks can continue to provide credit and support customers, then forced sales are less likely and the risk of negative feedback loops between the housing market and the broader economy is reduced.
Table 3 below gives an overview of the key indicators we use when carrying out our risk
assessment.

---

28 Our estimate of sustainable house prices could also decline. For example, if neutral interest rates are revised higher or if rents fell it would impact at least some of the indicators we consider.

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Table 3: Indicators used in our risk assessment
Vulnerability Indicators
Probability of correction
We use a suite of indicators to estimate the sustainable level of house prices to inform our assessment of the probability of a correction.29 The suite includes indicators that reflect the opportunity cost of owning a house, using historic relationships as a benchmark. 30 A key driver of all these indicators is neutral interest rates.31 We use estimates of neutral rates from our Monetary Policy Statements. A caution with our house price suite is that it can be revised over recent history given neutral interest rates are revised. We also consider population growth relative to the construction of new housing, and people per dwelling. These drive rental inflation, which also affects house prices. Riskiness of new lending Key indicators for this category include mortgage credit growth and the composition of new lending across LVR and DTI buckets. While we focus on the share of high-LVR and high-DTI lending, we also consider the share of lending just below the thresholds. We look at drivers of bank lending standards, particularly the test interest rates that banks are using in their affordability assessments for new borrowers. Our Credit Conditions Survey can provide insights into lending standards across the industry. We also consider the share of lending to different buyer types (such as first home buyers, owner-occupiers and investors), given the differing risks from each type of borrower. Vulnerabilities amongst indebted households more generally We look at trends in household debt, including household debt-to-income ratios, debt servicing ratios, and mortgage arrears and default rates. The share of interest-only borrowers and scheduled mortgage repayments can also be useful for signs of debt servicing stress. We may also look at developments in the labour market including real wage growth, the unemployment rate and projections. We sometimes produce estimates of dynamic LVRs for existing loans. Dynamic LVRs account for house price inflation since the loan was originated and debt repayments. For example, this can be used to estimate the share of loans in negative equity after a fall in house prices. When loan-level data becomes available, which is expected to be in late-2026, 32 this will allow us to add new and better indicators, improving our assessment of vulnerabilities amongst existing mortgage borrowers. ____________ 29 Our definition of sustainable house prices is the level that house prices should move towards based on the medium-term outlook for the underlying drivers of the housing market. See Measures for assessing the sustainability of house prices in New Zealand. Our latest estimate of the sustainable house price suite is available at Financial stability indicators. 30 For example, mortgage costs relative to income for a hypothetical new buyer, the cost of renting relative to interest servicing costs, the rental yield relative to interest rates, and the user cost of housing. 31 The neutral interest rate is conceptually the rate that,
on average over time, would be consistent with no over- or under￾utilisation of resources and stable inflation. Castaing, Chadwick, Galimberti, Sing, & Truong (2024) explain how the Reserve Bank estimates the neutral interest rate and its use in formulating monetary policy. 32 See Loan level data collection - Reserve Bank of New Zealand - Te Pūtea Matua

Macroprudential Policy Framework 24
Vulnerability Indicators
Resilience of lenders
The main indicators of bank resilience are capital ratios and the share of bank loans that are housing loans. Other indicators like profitability, liquidity mismatch and core funding ratios could also be useful, at times. We can draw on the findings from stress tests that assess the sensitivity of banks’ credit portfolio to plausible stress scenarios, and the capacity of banks to cope with a deterioration in funding conditions. Indicators of credit availability and lending policies from our Credit Conditions Survey may also be useful. We would consider tightening settings as risks increase Based on our assessment of these four vulnerabilities, we consider if overall risks are building sufficiently to warrant tighter settings. We expect to generally focus on LVR restrictions (and where they sit relative to our long-run assumption). However, at times, we may also consider adjusting DTI restrictions, especially as we learn more about their impact. If risks were elevated in a specific sector, we could consider activating the SCR, but we expect that this would be relatively unlikely. Conditions for tightening settings The risk of a house price correction and the riskiness of new lending are key indicators. Two notable situations where tighter settings could be warranted are:
 If house prices were well above our sustainable estimates, like they were in 2007 and 2021. Based on our current estimates, house prices were 28% above the mean of our sustainable indicators in 2007 and 30% above in 2021. While we would not necessarily wait for house prices to get this far above sustainable levels before responding (partly because estimates at the time may not be as large), this gives an appreciation for how much house prices can temporarily exceed our sustainable estimate. Given this context, a deviation of less than 10% above the mean is unlikely to be a major concern on its own.  If household credit growth was high, banks were using most of their speed limits for high-LVR and high-DTI lending, and there was a build-up of lending just below the high-LVR and high￾DTI thresholds. Annual mortgage credit growth exceeded 10% from 2003 until 2008, a period of rapid growth in household debt. Since then, it has only exceeded 10% briefly in 2021. We would consider tighter settings if similar situations were expected to develop. Our response would depend on the extent this growth was underpinned by high-LVR and/or high-DTI lending. In any situation where we considered tightening, we would also consider our assessment of the vulnerabilities amongst indebted households and the resilience of lenders. Unless we see one of the situations above (or aspects of them), we expect vulnerabilities amongst existing household borrowers or developments in the resilience of lenders to rarely warrant changes in settings on their own. 33 ____________ 33 Unintended effects of LVR and DTI restrictions (such as on access to credit for first home buyers) are more of a focus in our less-regular reviews of the long-run settings. However, we monitor them regularly and if we saw a significant change we would take it into account in our annual reviews as well.

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Restoring LVR restrictions to their long-run levels When risks are no longer particularly elevated, we would look to return LVR settings back to their long-run level. We would use the same assessment criteria and indicators as we did for tightening, including for example whether house prices are significantly above what is sustainable. Easing settings may be gradual. For example, in 2023 and 2024 we eased LVR settings in steps. For owner occupiers, we increased the speed limit applied to new lending above an LVR of 80% from 10% to 15% in 2023. The following year we increased the speed limit again to 20%. The exception to this gradual approach is in an economic downturn, when we may return LVR settings to their long-run level more quickly, but this would depend on the situation. Easing the CCyB is our preferred response to an economic downturn An easing of macroprudential settings may be beneficial to support the provision of credit during a significant economic downturn. Easing the CCyB is best suited to this because it supports lending to both households and businesses, meaning it has broader benefits than easing LVR or DTI restrictions. We could also consider easing the CFR requirement if there was a disruption in funding markets. We are wary about easing LVR or DTI restrictions during a period of systemic stress to looser settings than the long-run level. These tools are designed to prevent a build-up of systemic risk before a downturn occurs, but are less effective in response to downturns to support the economy. There may be a lack of demand for higher risk lending and banks may not want to lend in this situation. We also may not want to promote risky lending in case conditions change quickly. As highlighted by our experience easing LVR restrictions at the start of the COVID-19 pandemic, the housing market can be unpredictable, and it takes time to reinstate LVR restrictions. 34 One situation where we would consider easing LVR or DTI restrictions is if they were tighter than their long-run level, to bring them back to their long-run level. If easier settings than the long-run level were thought necessary, we would prefer to ease the restrictions rather than fully removing them. Another option is to remove restrictions for a specific period, which we would state publicly, then we could extend this if the downturn persists. Conditions for reducing the CCyB The purpose of easing the CCyB in a downturn is to reduce the likelihood that banks’ capital positions constrain lending, which could make the downturn worse. Given this, easing the CCyB would generally be appropriate if both:
 Capital ratios across the banking system as a whole were declining or at a heightened risk of declining materially (that is, to the point where capital buffers no longer exceeded the required levels). 35 To assess this in a timely manner, we would be forward looking and likely review settings between our annual reviews. This means in the early stages of a recession we would likely use projections of economic activity along with credit risk models and previous stress test results to estimate (approximately) how much capital could fall. 36 We could make use of the Reserve Bank’s Monetary Policy Statement projections. We would also need to consider other ____________ 34 See the box on macroprudential policy during the COVID-19 pandemic in Reflections on a decade of using macroprudential policy 35 Note that reducing the CCyB is not our intended response to an idiosyncratic shock impacting a single deposit taker. 36 To support this, we intend to develop our own models for projecting capital ratios based on a given economic scenario.

Macroprudential Policy Framework 26 policy responses, such as restrictions on dividends (which we put in place during the COVID-19 pandemic).  Credit conditions had materially tightened or were expected to do so. Tighter credit conditions may be reflected in more stringent lending policies by banks or a reduction in lending appetite across sectors. In addition to industry outreach, we would use our Credit Conditions Survey to get information from banks on expected credit availability and lending policies. If needed, we could run additional rounds of this survey outside of the usual six-monthly rhythm. This would give us the banks’ perspectives of any changes or expected changes in the supply of credit. We would also monitor credit growth across sectors, although this can be lagging and would also be influenced by demand for credit. Once we decide to lower the CCyB, we would reduce it immediately. We would reduce it by either
0.5 or 1 percentage point depending on the severity of the situation.
As an example, it is likely we would have reduced the CCyB during the early stages of the COVID￾19 pandemic, had it been in place then. There was broad agreement across the public and private sector that the economic impact would be severe. Given this, we would likely have assessed that capital requirements would become binding and expected a worsening in credit conditions if those scenarios had played out as predicted. Many countries that had the CCyB already in place (such as in Europe) eased it at the start of 2020 to support lending to households and businesses. Restoring the CCyB to its long-run level We intend to return the CCyB to its long-run level (1%) at an early opportunity after the worst of the period of systemic stress has abated. We would want to be confident the economy is recovering - for example, by having seen some increase in economic activity and by considering projections for economic activity. We would only restore the buffer if we were confident it would not prolong the downturn – for example, by adversely affecting access to credit. For this to be the case, banks would need to have the ability to raise capital or have enough capital already to meet the increase. We would assess this by considering bank capital ratios at the time, as well as their profitability and market conditions for raising capital. We would announce increases in the CCyB ahead of time to give banks time to raise capital. For example, we would likely give banks around a year to increase it back to the 1% level if starting from zero. The rate of increase will depend on conditions at hand, and we could adjust in smaller increments (such as 0.25 or 0.5 percentage points) if necessary to avoid prolonging the downturn. If the CFR requirement was eased, we would only restore it to its usual level once we were confident that banks could again source stable long-term funding on reasonable terms. We would also need to be confident that there was already sufficient credit availability for credit-worthy borrowers and that increasing the CFR requirement would not negatively impact this. As with the CCyB, we would give banks time to transition back to the usual requirement. See Appendix C for more information on how we expect to set macroprudential policy in different parts of the cycle and how this may interact with monetary policy settings.

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7. Consultation and stakeholder engagement
Macroprudential policy is designed to promote financial stability, but as highlighted in box A it can also have unintended impacts. Part of the purpose of publishing this framework document is to be transparent about how we use macroprudential tools and how we consider these trade-offs. Another way we ensure transparency is through public consultation, cost-benefit analysis and stakeholder engagement. Public consultation on macroprudential policy Public consultation includes publishing an explanation of the policy decision and giving people outside the Reserve Bank an opportunity to submit their views. This is good for transparency and for getting feedback. However, there is a trade-off to consider. For some policy changes, quick adjustments can help to ensure settings are right for the situation at the time. Producing the material and allowing time for public consultations takes time (and resources both for us and our stakeholders). Delays with adjustments to settings can make it harder to meet the policy objectives. For example, if housing-related risks build quickly then tighter LVR settings can help to constrain high-risk lending and prevent a cohort of risky borrowers, which in some situations could subsequently contribute to housing volatility and banking sector losses. We saw this around the end of 2020 and the start of 2021 when it took around 6 months to reinstate LVR restrictions. These restrictions had been removed during the onset of the pandemic. By the end of 2020, the housing market was booming and risky lending had increased. 37 The delay in reinstating restrictions meant more high-risk lending occurred than we would have liked. A quick response is not always important. Changes to our assumption of long-run LVR and DTI settings can be done without urgency. A public consultation would be important if a material tightening in one of these tools was being considered. This would give us an opportunity to explain and get feedback on the benefits of tighter policy settings and the trade-off with any unintended impacts. A public consultation is less beneficial for immaterial changes and when we ease settings. Therefore, our view is that we will publicly consult when introducing new tools and for non-urgent tightening of settings.
Table 4: Public consultation on macroprudential policies
We will publicly consult … We will typically not publicly consult … Developing and implementing a new tool (like we did with DTI restrictions). Tightening LVR/DTI settings temporarily when risks are elevated (for example, a reduction in the speed limits for owner occupiers). ____________ 37 See the box on macroprudential policy during the COVID-19 pandemic in Reflections on a decade of using macroprudential policy

Macroprudential Policy Framework 28
We will publicly consult … We will typically not publicly consult … Tightening LVR/DTI settings due to a change in our assumption for the long-run level. Removing and reinstating the CCyB in and around a significant downturn. Loosening LVR/DTI restrictions. To implement changes to LVR and DTI settings, previously we have made changes to banks’ conditions of registration and in the future will need to make changes to banks’ licence conditions. For these changes we consult with banks for a short period. This is largely an operational process, focusing on how the change is implemented rather than policy decision itself. If we were tightening policy, we would allow time for banks to manage their existing pre-approvals before the changes take effect. We would also engage with banks prior to reinstating the CCyB to collect information about any unintended consequences from increasing their capital requirements. Regulatory impact assessment When considering changes in macroprudential policy settings, we consider if the benefits of that change outweigh the costs and other potential unintended consequences. This includes considering if other regulatory responses could better meet our objectives in the situation at hand. We carry out and publish regulatory impact assessments in line with the requirements as per our legislation. 38 This provides further transparency around our decisions, including in cases where the urgency of the situation means we do not consult publicly before implementing a change in settings. Engagement with the Minister of Finance and Treasury While decision making on macroprudential policies is delegated to the FPC by the Reserve Bank Board, we inform the Minister of Finance and Treasury prior to macroprudential policy announcements. This is in line with the MoU with the Minister of Finance and helps support co￾ordination between our response and any broader government response to the situation at hand. We intend to continue informing the Minister of Finance in this way when the DTA standards come into effect in December 2028. Our view is that after having introduced DTI restrictions in 2024, we have all the macroprudential tools we need for now. However, if over time we form the view that there would be benefits from implementing a new tool, we would need to amend our regulatory requirements and would consult the public and other authorities accordingly. Moreover, if we wanted to apply lending restrictions to a different sector other than housing, this would also require approval from the Minister of Finance. ____________ 38 See Reserve Bank of New Zealand Act 2021 No 31 (as at 27 November 2025), Public Act Assessment of regulatory impacts of policies – New Zealand Legislation

Macroprudential Policy Framework 29
8. Review and evaluation
In addition to the regular review of settings outlined in the Decision-Making Process section, we need to step back from time to time and look more holistically at the scope of our restrictions and our long-run assumptions. Reviewing the scope of macroprudential policy LVR and DTI restrictions do not apply to all lenders. As such, there is potential for leakages to occur outside of the current regulatory perimeter, which could undermine the effectiveness of macroprudential policy. For example, in the context of the DTA, we do not intend to apply macroprudential policy to Group 3 deposit takers and non-deposit taking lenders as they are small and do not pose systemic risk. However, if these sectors grow rapidly, they may start to pose greater systemic risk. The market share of non-bank lenders has remained low since 2013, suggesting there has not been a significant shift in housing lending away from banks to avoid LVR restrictions. However, we intend to monitor lending that occurs outside of the current regulatory perimeter as part of our annual reviews of macroprudential policy settings and will re-evaluate our approach as needed. For example, we could apply our macroprudential policy tools to Group 3 deposit takers and/or non-deposit taking lenders. Relatedly, we also monitor the use of warehousing arrangements where one lender provides finance for loans originated by another lender. Often these facilities are provided by a deposit taker in scope of LVR and DTI restrictions to lenders who are not in scope of the restrictions. The loan warehouse can be securitised when it reaches a certain size, where rights to the cash flows from loans are packaged together and sold as a security. If we consider that the use of these loan warehouses is resulting in a build-up of systemic risks, we will reconsider whether our treatment of these facilities remains appropriate. Reviewing the long-run assumptions for DTI and LVR settings We also intend to periodically review our macroprudential policy framework and tools, albeit not as frequently as our reviews of the settings. For instance, we intend to review the long-run assumptions for LVR and DTI restrictions every 3 to 5 years. These reviews will take a broader perspective than the annual reviews, which tend to focus on housing-related risks at the time. Reviews of long-run settings will consider things like lessons learned since the last review, trends affecting the effectiveness of policies and risks to the financial system. We would also look at interactions between macroprudential policies and other policies that have changed, as well as evidence of unintended consequences. For example, following the introduction of DTI restrictions in 2024 we reviewed the long-run settings for LVR restrictions. We concluded that having DTI restrictions in place would allow for a slightly looser long-run assumption for LVR settings. DTI restrictions help to underpin borrower resilience by addressing a different dimension
of risk to LVR restrictions (as described in the section on interactions between policy tools). We also considered capital requirements, an international comparison of LVR settings, and recent evidence of the impacts on these restrictions on first home buyers. For our future reviews of long-run DTI restrictions, we intend to also look at changes in neutral interest rates. A shift in neutral interest rates could affect the riskiness of loans with a given DTI

Macroprudential Policy Framework 30 ratio, suggesting different DTI settings may be preferable. Without changes to the settings, DTI restrictions could become either excessively binding or not really binding at all. Our understanding of neutral interest rates is slow-moving and uncertain so more frequent adjustments to DTI settings for this reason would not be justified. Reviewing this document We may update the macroprudential policy framework on a similar timeframe to our review of long-run settings to reflect any changes to relevant legislation (and the Financial Policy Remit) and/or our approach to macroprudential policy.

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References
Akinci, O., & Olmstead-Rumsey, J. (2018). How effective are macroprudential policies? An empirical investigation. Journal of Financial Intermediation, 33, 33-57. Ampudia, M., Lo Duca, M., Farkas, M., Pérez-Quirós, G., Pirovano, M., Rünstler, G., & Tereanu, E. (2021). On the effectiveness of macroprudential policy. European Central Bank Working Paper Series, No 2559. Bank for International Settlements. (2023). Macroprudential policies to mitigate housing market risks. CGFS Papers, No 69. Bank of England. (2014). The Financial Policy Committee's powers to supplement capital requirements. Basel Committee on Banking Supervision. (2024). Range of practices in implementing a positive neutral countercyclical capital buffer. Behn, M., Abreu, D., Ciampi, F., Ciocchetta, F., Cornacchia, W., Drenkovska, M., . . . Virel, F. (2024). The sectoral systemic risk buffer: general issues and application to residential real estate￾related risks. European Central Bank Occassional Paper Series, No 352. Behn, M., Rancoita, E., & Rodriguez d'Acri, C. (2020). Macroprudential capital buffers - objectives and usability. European Central Bank Macroprudential Bulletin, Issue 11. Bloor, C., & Lu, B. (2019). Have the LVR restrictions improved the resilience of the banking system? Reserve Bank of New Zealand Analytical Note Series, AN2019/05. Castaing, A., Chadwick, M., Galimberti, J. K., Sing, M., & Truong, E. (2024). Estimates of New Zealand's Nominal Neutral Interest Rate. Reserve Bank of New Zealand Bulletin, 87(4). Claessens, S., Dell'Ariccia, G., Igan, D., & Laeven, L. (2010). Lessons and Policy Implications from the Global Financial Crisis. IMF Working Paper, WP/10/44. de Roiste, M., Fasianos, A., Kirkby, R., & Yao, F. (2019). Household Leverage and Asymmetric Housing Wealth Effects - Evidence from New Zealand. Reserve Bank of New Zealand Discussion Paper Series, DP2019/01. Floden, M. (2014). Did household debt mater in the Great Recession? Retrieved from supplement to Blog Post on ekonomistas.se:
https://www.martinfloden.net/files/hhdebt_supplement_2014.pdf Lo Duca, M., Bartal, M., Giedraitė, E., Granlund, P., Hallissey, N., Jurča, P., . . . Vauhkonen, J. (2023). The more the merrier? Macroprudential instrument interactions and effective policy implementation. European Central Bank Occassional Paper Series, 310. McDonald, C. (2025). Our approach to macroprudential policy through the cycle. Reserve Bank of New Zealand Bulletin, 88(9). Price, G. (2014). How has the LVR restriction affected the housing market: a counterfactual analysis. Reserve Bank of New Zealand Analytical Note Series, AN2014/03. Shleifer, A., & Vishny, R. (2011). Fire Sales in Finance and Macroeconomics. Journal of Economic Perspectives, 25(1), 29-48. Thornley, M. (2016). Financial stability risks from housing market cycles. Reserve Bank of New Zealand Bulletin, 79(12).

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Appendix A: Legal and regulatory framework prior to the DTA
coming into effect
The Banking (Prudential Supervision) Act 1989 gives the Reserve Bank the power to impose conditions of registration on registered banks if we are satisfied that they are necessary or desirable to achieve one or more of the purposes set out in section 68 of the Act. Conditions of registration can cover a range of matters, such as capital and risk management, which may include quantitative restrictions based on macroprudential policy tools. Macroprudential policy requirements are detailed in Banking Supervision documents, notably BS19:
Framework for restrictions on high-LVR residential mortgage lending and BS20: Restrictions on High Debt-To-Income Residential Mortgage Lending. The exact settings for macroprudential policy tools are generally not included in Banking Supervision documents but are formally imposed on each bank through their conditions of registration.39 Macroprudential policy applies to all registered banks. It does not apply to non-bank deposit takers. The operation of macroprudential policy is guided by a memorandum of understanding (MoU) between the Minister of Finance and the Governor of the Reserve Bank. While the MoU is not legally binding, it sets out agreed operating guidelines and requires the Reserve Bank to consult both the Minister of Finance and the Treasury when macroprudential policy tools are under active consideration. The MoU was initially established in May 2013 and included LVR restrictions, adjustments to the CFR, the CCyB, and SCR.40 It was then updated in August 2021 to include debt serviceability restrictions (such as DTI restrictions). 41 ____________ 39 Changes to conditions of registration are imposed under section 74 of the Banking (Prudential Supervision) Act 1989. 40 See RBNZ signs MOU on use of macro-prudential tools - Reserve Bank of New Zealand - Te Pūtea Matua 41 See Macroprudential policy and operating guidelines - Reserve Bank of New Zealand - Te Pūtea Matua

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Appendix B: International approaches to macroprudential
policy
Macroprudential policy is widely used to mitigate systemic risk by building borrower and lender resilience and, in some cases, explicitly seeking to dampen financial cycles (Bank for International Settlements, 2023). A range of tools are used internationally with different calibrations, reflecting country-specific factors and that macroprudential policy is a relatively new policy area. The use of macroprudential tools became much more widespread after the global financial crisis, particularly to target risks in the housing market. The crisis showed that microprudential policy alone was insufficient for financial stability as it fails to account for how stress at individual institutions can affect the broader system or for risks that build up over financial cycles (Claessens, Dell'Ariccia, Igan, & Laeven, 2010). Research suggests that macroprudential policy has since been effective at increasing borrower and lender resilience and at dampening the amplitude of financial cycles internationally (Akinci & Olmstead-Rumsey, 2018; Ampudia, et al., 2021). Borrower-based measures LVR restrictions (sometimes called Loan-to-Value limits) are the most commonly used borrower￾based tool for addressing systemic housing market risks (Bank for International Settlements, 2023). These measures are used by around 70% of Organisation for Economic Co-operation and Development (OECD) member countries, most of which have also introduced debt serviceability restrictions (DSRs). 42 These are typically implemented through tools such as debt-service-to income limits, loan-to-income restrictions, or test interest rate floors.43 DTI restrictions are relatively less common internationally, but they were activated in Australia in early 2026 to pre-emptively limit the build-up of systemic risk.44 Most countries that have DSRs and LVR restrictions set the policies independently. However, in a few OECD countries the policies are set explicitly in conjunction with one another, for example, restrictions might only apply to loans that meet both an LVR and DTI threshold.45 Among other OECD countries with independent LVR and DTI restrictions (including Czechia, Latvia, Norway and Slovakia), countries with a lower high-DTI threshold tend to have a larger lending speed limit, and countries with tighter LVR restrictions tend to have looser DTI restrictions. Regular cyclical adjustments to borrower-based measures are relatively uncommon amongst OECD countries, though some countries may add or tighten measures if there is concern about a build-up of systemic risk. Policy settings are typically calibrated to historical periods where lending standards and capital buffers were deemed prudent and maintained through the financial cycle to build system resilience. Guardrail approaches are also used for DSRs, including in Australia. If settings need to be adjusted or refined over time, changes tend to be gradual to mitigate financial system disruption. ____________ 42 The IMF’s Global
Macroprudential Database provides information on the use of macroprudential policy and descriptions of policy tightening and loosening around the world. See IMF Macroprudential Database 43 DSTI restrictions limit the percentage of a borrower’s income that can be allocated to servicing debt payments. Test interest rate floors set a minimum value for the test interest rates used by banks in their mortgage serviceability assessments. We consulted on the potential use of DSRs in 2021, including these tools, and considered DTI restrictions would be more effective at supporting financial stability and easier to implement. See Consultation Paper: Debt serviceability restrictions 44 See Activating debt-to-income limits as a macroprudential policy tool | APRA 45 For example, in Denmark, restrictions are placed on the types of loans that households can have when their LVR is between 60% and 95% and their DTI ratio is greater than 4.

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Capital and liquidity-based tools
The CCyB is a widely used macroprudential instrument, with all BCBS member jurisdictions having implemented a CCyB framework along with many non-member jurisdictions. Initially, the CCyB was mostly used to address cyclical risks and would be set at a default rate of zero until risks were elevated. However, in recent years an increasing number of countries have adopted a positive setting for the CCyB when systemic risks are neither subdued nor elevated (called a positive neutral CCyB), generally in the range of 0.5% to 2% (Basel Committee on Banking Supervision, 2024). Unlike New Zealand’s approach, countries that have implemented a positive neutral CCyB rate still emphasise increasing the CCyB when systemic risks are elevated. A wider range of other capital and liquidity-based tools are generally used internationally. Historically, some countries have implemented the SCR largely through risk weight overlays (Bank of England, 2014) and, more recently, several European countries have implemented sector￾specific capital buffers to address risks related to residential mortgage lending (Behn, et al., 2024). 46 Additionally, some requirements that form part of our broader prudential regime may be considered as macroprudential instruments in other countries. This includes the capital conservation buffer and capital surcharges for systemically important banks in Europe, as these tools are designed to mitigate negative feedback loops between the financial system and the economy when there is a shock (Behn, Rancoita, & Rodriguez d'Acri, 2020). ____________ 46 An SCR may be implemented alongside borrower-based measures if there are concerns about existing lending to a specific sector. The SCR applies to the stock of lending in the targeted sector, but borrower-based measures only apply to new lending, so it takes time for the full impacts of the policy to be realised on the overall stock.

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Appendix C: Macroprudential policy settings in different parts
of the cycle
Table 5 below gives examples of how we expect to adjust macroprudential settings in different
situations. This table also outlines interactions with monetary policy in each situation.47
Table 5: Macroprudential policy settings in different parts of the cycle
Macroprudential policy settings Monetary policy interactions and having regard to financial stability Periods without exuberance with limited risks to new mortgage borrowers Both LVR and DTI restrictions would be set at levels that promote resilience, reducing the probability of shocks being amplified by borrower distress which could impact financial stability. To minimise efficiency costs, we prefer a combination of both DTI and LVR restrictions. LVR settings can be less restrictive with DTI restrictions also in place than with LVR restrictions alone. We would look to put in the CCyB in place before systemic risk starts to build up (consistent with our early-set approach). This would allow us to reduce or remove it in a downturn to reduce the likelihood that banks’ capital positions constrain lending. Financial stability considerations would be immaterial for monetary policy decisions. Delivering low and stable inflation would be the best contribution monetary policy could make to financial stability. ____________ 47 This table was initially published in Our approach to macroprudential policy through the cycle.

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Macroprudential policy settings Monetary policy interactions and having regard to financial stability Periods of exuberance with low interest rates causing greater accumulation of risky lending DTI settings are designed to automatically become binding during periods of low interest rates. This supports the resilience of new borrowers that would otherwise worsen. We would likely keep LVR restrictions unchanged, with DTI restrictions stabilising lending conditions. However, LVR restrictions may be tightened in particularly high-risk situations, like when house prices start increasing significantly above sustainable levels. Concerns about risk taking due to low interest rates can be partially mitigated with macroprudential tools, making monetary policy decision makers more comfortable to focus on supporting inflation. In theory the Monetary Policy Committee could still choose to adjust the monetary policy stance for financial stability risks. However, in practice there would be a high bar for such a response given the implications for other objectives. DTI restrictions would become binding which could impact the transmission of monetary policy at the margin. Periods of exuberance with high interest rates at the same time as a booming housing market and increasing risks Settings at around long-run levels for both LVR and DTI restrictions would be consistent with ensuring ongoing household resilience. However, if risks to new lending were becoming particularly elevated, tighter LVR restrictions would be the best action to address this. DTI restrictions may not be binding as DTI ratios for new borrowers tend to be lower during periods of high interest rates. High interest rates to deliver low and stable inflation would support financial stability by helping to limit housing-related risks.

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Macroprudential policy settings Monetary policy interactions and having regard to financial stability Stagflation scenario with high inflation and interest rates, creating financial stability risks The concern in a stagflation scenario is the impact of high interest rates on existing borrowers, given rising debt servicing costs and potentially falling house prices. It would be important that borrower resilience had been built up earlier via robust LVR and DTI long-run settings. New borrowers would likely have lower debt levels as interest rates reduce mortgage affordability. Settings at around long-run levels would generally be sufficient to ensure ongoing household resilience. However, if risks to new lending increased for some reason, tighter LVR restrictions could be used to address this. Monetary policy should focus on getting inflation on target. However, if high interest rates were causing unmanageable strain on households and businesses resulting in a widespread tightening in lending conditions, monetary policy may be set slightly looser than otherwise. As a result, inflation may take slightly longer to return to target. Periods of significant economic and financial stress like early 2020 or 2008/09 Some easing of macroprudential settings may be beneficial to support the provision of credit. Once the CCyB is in place, easing it would be our preferred response if we expected banks’ capital ratios to fall. We could also consider easing the CFR requirement. Easing LVR or DTI restrictions is another option, but it may not be that beneficial and could create risks. If some easing is still desired, we would prefer to ease LVR restrictions and maybe DTI restrictions to a full removal. Another option is to remove restrictions for a specific period (for example, a year) and extend this if the downturn persists. Monetary stimulus to support inflation and economic activity would be the best contribution to financial stability. To the extent that easing macroprudential settings supports credit growth, this would also support inflation and employment