A gut feeling that New Zealand's banks may not have learned their lesson around prudent lending is holding Reserve Bank governor Adrian Orr back from easing loan to value restrictions. At the half-yearly Financial Stability Report release yesterday, the RBNZ gave the financial system a pass mark, but said it needed confidence that moderation of mortgage lending growth will continue before it could loosen its LVR restrictions.Orr said the RBNZ (which has the responsibility for regulating the country's banks) would not consider any changes to the restrictions before the next Financial Stability Report in six months' time."Because we have seen the growth slowing, we're thinking about the easing ,but we have just pulled up short this time and thought 'no, too early'", Orr told Parliament's Finance and Expenditure select committee later on Tuesday."I think the most instructive bit is that bank lending really does respond to where those LVRs are set, so they were pushing as close as they could get without risk of breach to the LVR," he said. "As they have eased you have seen the banking market again adapt and move back to about where those levels are."At the press conference following the release of the FSR, Orr told Banking Day the decision by interim RBNZ governor Grant Spencer to relax the restrictions last year, prompting a minor re-heating of the market, was not a mistake because it allowed the regulator to observe how the banks behaved in response.What the RBNZ saw doesn't seem to have filled it with confidence that the banks could be trusted to be prudent without any restrictions on their lending."Our challenge around confidence is to think, 'what would happen in the absence of those LVRS?'" Orr said"Would banks go back to their less prudent lending behaviours, or would they have picked up a lesson? So it is going to be an iterative process for us."Asked by Banking Day what his "gut feeling" was about how banks would respond, Orr said: " It's a great question, hence my angst around this.""That's why we are just sitting there. I think part of this bank conduct review [see below] will be an interesting time to talk about their lending horizons." The Reserve Bank is still keen on adding more tools to its macro-prudential toolkit. Orr is particularly keen to add the ability to impose "debt to income" restrictions, which would set strict limits how much banks could to lend to home buyers based on the borrower's income."We are positively pursuing them through the Reserve Bank review of our legislation," Orr said. "We really do want to get our heads around it. If it is a tool where no one is worse off and someone may be better off then we would like to add it to our tool kit," he said.