Central bank conducted two stress tests this year
It seems the New Zealand banking sector has remained resilient despite the persistence of the COVID-19 pandemic and is ready to face new challenges, highlighting the benefits of continuing to build capital buffers, according to the latest stress tests of the Reserve Bank of New Zealand (RBNZ).
The annual bank stress testing program helps the Reserve Bank understand the implications of risks to financial stability by assessing the resilience of participating banks to hypothetical, severe, but plausible stress scenarios.
This year, the RBNZ conducted two stress tests: The regular Solvency Stress Test that tested the resilience of banks’ capital, and the Liquidity Stress Test that tested banks’ liquidity and funding resilience.
RBNZ deputy governor Geoff Bascand said that the Solvency Stress Test showed that the New Zealand banking system has become more resilient than a year ago due to higher capital levels. It is also well placed to support the economy if conditions worsen.
However, Bascand clarified that the results indicated that “a major stress event could make it difficult for banks to meet higher capital requirements in the lead up to [the] full implementation of the new Capital Review standards in 2028. This reinforces the need for banks to continue to build capital in good times.”
Read more: Report identifies material shortcomings with Westpac NZ’s risk governance
Meanwhile, the Liquidity Stress Test, the Reserve Bank’s first banking industry test focused on liquidity since 2003, assessed the resilience of the 10 largest banks in New Zealand against unique liquidity shocks that result in a significant outflow of deposits and limits on access to market funding. It was designed to test the extent of banks’ ability to meet customer withdrawals under severe assumptions.
The test found that only four banks’ liquid assets could meet their net cash flows for a period greater than six months during an adverse scenario before mitigating actions were needed. Moreover, only one bank lasted long in the severe adverse scenario.
“Large banks fared worse than the smaller banks. However, banks were able to identify actions that, if effective, would considerably improve the outcome,” Bascand said.
Aside from releasing the results of its annual stress test program, the RBNZ recently announced that it is now seeking feedback on its proposed Deposit Takers Bill.
The law proposes the creation of a regulatory regime for all deposit-taking institutions, including some non-banks, bringing them into a wider regulatory framework. It also aims to further empower the RBNZ to scrutinise non-banks that fall into the new parameters and introduce deposit insurance for deposits of more than $100,000.
The Reserve Bank will accept feedback until February 21, 2022. It is also set to host workshops and information sessions to take the temperature of the industry.
