The Reserve Bank of New Zealand has proposed banks hold more capital for higher loan to value ratio loans in a move to slow a surge in riskier lending and housing inflation.The Reserve Bank is increasingly concerned about how a near doubling of high LVR lending over the last year has added fuel to a surge in house price inflation, particularly in Auckland. Governor Graeme Wheeler said earlier this month lending over 80 per cent of house value had almost doubled to 30 per cent of new lending in the last year. Annualised household lending growth doubled to 3.8 per cent between July last year and January, and has risen from 1.1 per cent a year earlier. House price inflation is running at double digit rates in Auckland and Christchurch, and is beginning to accelerate in nearby provinces."The aim of the current review is to ensure that banks' baseline capital requirements for housing loans properly reflect risk in the housing sector, particularly in relation to Loan to Value Ratios," Deputy Governor Grant Spencer said.The move is a surprise as it comes in advance of a framework for macro-prudential controls being developed for the middle of 2013. The Reserve Bank has previously said they could include limits on LVRs and an increase in capital requirements for mortgage lending, but had not signalled the possibility of higher capital requirements for higher LVR loans."A review is timely right now given the Reserve Bank's current proposal to introduce a macro-prudential policy regime. It makes sense to get the baseline capital requirements right before the macro-prudential framework is introduced," Spencer said.The bank has issued a consultation paper here and wants submissions by April 16. The consultation points to analysis showing the capital requirements for high LVR loans under Basel II were not high enough to account for the risk of default. The bank said it had analysed loss rates for high LVR loans from 2008 to 2012 and found loss rates higher during a downturn than for low LVR loans.The bank included models for a 40 per cent house price slump and a starting mortgage interest rate of seven per cent, which is above the five per cent to six per cent currently. The bank estimated an extra 14 per cent to 23 per cent in capital would be required with its proposals for more capital for high LVR loans.