RBNZ flags risks from global tensions
The Reserve Bank has highlighted geopolitical tensions as a significant threat to financial stability, releasing preliminary insights from its 2024 Reverse Stress Test.
As part of its Financial Stability Report, RBNZ’s findings highlight the need for proactive risk assessment to protect the economy from potential global shocks.
Stress test models severe economic downturn scenarios
The Reverse Stress Test required banks to model extreme scenarios that could push their capital below regulatory minimums.
Banks used hypothetical cases of deep recessions, rising unemployment, and plummeting property prices, often identifying escalating geopolitical tensions as the primary risk factor.
In addition to these challenges, banks anticipated secondary shocks, such as cyber attacks or losses in insurance coverage, which could further compound financial difficulties.
Kerry Watt (pictured), RBNZ’s director of financial stability assessment and strategy, commented on the value of the exercise.
“The Reverse Stress Test prompted banks to explore severe scenarios that threatened their businesses and identify how they might respond,” Watt said. “It has also been a valuable exercise for testing and enhancing industry’s risk management capabilities.”
Financial institutions explore risk mitigation tactics
In response to these hypothetical shocks, banks examined strategies to bolster capital, including reducing dividends, cutting costs, tightening lending standards, and adjusting loan terms.
These preemptive measures aim to help banks recover financially while limiting broader economic impacts.
RBNZ’s analysis has enhanced its understanding of financial system vulnerabilities, while helping banks refine their risk management practices.
Watt highlighted the importance of public awareness in risk mitigation, noting that identifying risks is essential for financial resilience.
Geopolitical risks impact financial channels in NZ
RBNZ warns that as a small, open economy dependent on global trade and investment, New Zealand’s financial system is vulnerable to geopolitical disruptions. International tensions can trigger a variety of economic consequences, including market volatility, weakened domestic demand, increased loan defaults, and elevated funding costs.
Cybersecurity threats also emerge as potential risks within these scenarios.
“Concern about geopolitical tension has been increasing recently,” Watt said. “As a small open economy, dependent on international trade and investment, geopolitical risks are clearly relevant to our financial system. Their potential impacts cannot be underestimated.”
With the upcoming Financial Stability Report, RBNZ, which last month released its annual report for the year ending June 30, aims to bring attention to these global threats, stressing the importance of readiness to manage these risks and safeguard New Zealand’s financial stability.
Read the RBNZ media release here.
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