Indeed, my impression is that they are trying to get banks and borrowers to take into account risk they are currently ignoring.

Agreed that the distributional consequences will be interesting, over time the Bank will likely to be keen to create tools that are more direct when it comes to dealing with this quantum of missing risk they are chasing 🙂

Just a bit of context from the banks’ general disclosure statements. For example:

– KiwiBank’s lending book in the notes for LVR rose by $2.5b in the year to Mar-13. Of which $1.8b is over 80% LVR. 19% of their book over 80% LVR.

– ASB, rose by $2.9b of which $2.4b is over 80% LVR. 21% of their book is over 80% LVR.

These are net of repayments, so not all new lending.

so the RB logic is that the nature and/or magnitude of this rational/irrational lending by banks is driving material system risk. so centrally cap it. be interesting which potential lender’s may lose at the margins.

Agreed. I’ve said in the past I prefer to view it as an insurance mechanism given a recognition that the government is acting as a lender of last resort – and as a result I would prefer to see it discussed that way, instead of in terms of “prices”.