RBNZ releases stress test reports on economy, with promising signs
New stress test reports released by the Reserve Bank of New Zealand (RBNZ) – Te Pūtea Matua have revealed that the New Zealand mortgage market is more resilient than it was a year ago.
The RBNZ runs two annual stress tests designed to discover how well the economy would respond to adverse events, with the Solvency Stress Test for capital resilience and Liquidity Stress Test for liquidity and funding.
“The results of the regular Solvency Stress Test showed that the New Zealand banking system has a stronger level of resilience than a year ago, as a result of higher capital levels, and is well placed to support the economy if conditions were to worsen,” said RNBZ Deputy Governor Geoff Bascand.
“However, the results also indicated that a major stress event could make it difficult for banks to meet higher capital requirements in the lead up to full implementation of the new Capital Review standards in 2028. This reinforces the need for banks to continue to build capital in good times.”
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Liquidity was more of a concern, though only slightly so, according to Bascand.
“In the adverse scenario, only four banks’ liquid assets could meet their net cash outflows for a period greater than six months before mitigating actions were needed, while only one bank in the very severe scenario lasted that long,” he said.
“Large banks fared worse than the smaller banks. However, banks were able to identify actions that, if effective, would considerably improve the outcome.”
NZ economy is resilient
Kelvin Davidson (pictured), a chief property economist at CoreLogic NZ, said that New Zealand was still a very resilient economy.
“Generally, there’s a perception that the New Zealand banking sector is pretty resilient,” he said.
“How that has changed over the last 18 months is difficult to say, but the general sense is that it’s fairly resilient - certainly compared to other jurisdictions and other central banks.
“Our banking regulations, especially in the housing market, have been quite cautious for quite a long time. There’s been a lot of regulations.
“Loan-to-value (LVR) ratio rules have been in place for eight years now, where other banking regulators haven’t been so activist. Over time, those LVRs have been loosened and tightened depending on the cycle, but in general they’ve been cautious around the housing market and the impact that too much debt can have on the wider economy.
“For the most part, New Zealand is doing OK. From a borrower’s perspective, there’s some speed limits there, but you’ve pretty much had to have a 20% deposit for a while now. Investors have had to have 30% or 40%, so even if house prices did fall, the risk of negative equity and the spiralling effects that it can have on people are not a major problem at present.
“While there are some big mortgages, people have a fair amount of equity too. It’s fair to say that the banking sector isn’t too risky at present.”
