Reserve Bank of New Zealand Bulletin articles
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June 2011 (Vol. 74, no. 2)
Download the complete issue of the June 2011 Bulletin (PDF 5.9MB)
Articles
Editor’s Note (PDF 602KB)
Bank farm capital: does it cost the earth? (PDF 578KB)
Loans to the rural sector represent a significant exposure for banks in New Zealand. In 2008, under the Basel II capital framework, the Reserve Bank accredited the four major banks in New Zealand to use their own models of relative riskiness in calculating capital requirements for different types of lending. A condition of accreditation was that banks addressed, to the Reserve Bank’s satisfaction, weaknesses in their modelling of rural capital exposures and potential losses. In this article, we explore the work that has been undertaken since accreditation to seek to strengthen the modelling of risk on bank loans to the rural sector. The primary objective of this work was to ensure that the risk weights used in determining regulatory capital requirements are aligned with the underlying relative risk of the exposures. The finalised risk weights for rural lending will be lower than those used under the previous Basle I regime. We also discuss the impact of recent developments in the sector on bank behaviour, and consider the potential impact of the Reserve Bank’s new requirements, concluding that any impact should be relatively small.
Stress testing New Zealand banks’ dairy portfolios (PDF 689KB)
Stress testing a bank loan portfolio by estimating potential losses in a severe economic scenario provides a useful way of evaluating the risks that lenders face. This article describes a model that the Reserve Bank has constructed to analyse the risks facing banks that are lending to New Zealand’s dairy farming sector, which uses detailed information gleaned from bank loan portfolios. Simulations using the model show that simultaneous declines in both the dairy payout and security values have the potential to cause the greatest loan losses for banks. This is to be expected because the reduced earnings tend to increase farm borrowing initially, while falling rural land values erode the banks’ security values, making it more likely that a farm will exceed its borrowing limit. It is hoped that this exercise will assist banks to enhance their individual stress testing programmes and internal risk modelling by providing a base model for assessing credit risks in the dairy sector that can be customised for internal use.
Understanding financial system efficiency in New Zealand (PDF 660KB)
The recent global recession and international financial crisis have sparked fresh interest in financial data. Traditionally, data on the balance sheets of financial intermediaries has been collected fairly comprehensively, but data on debt securities markets has been considerably more patchy. New Zealand’s financial system is still dominated by lending intermediated by the balance sheets of banks. However, debt securities markets are likely to continue to grow in importance, and understanding developments, and changes through periods of stress, will be of growing importance, both to the Reserve Bank and to others wanting to understand the financial aspects of the New Zealand economy. The Reserve Bank has been seeking to build up its resources in this area and the next step in this will be the development of a security-by-security database covering the issuance of securities within New Zealand. This article outlines some of the reasons for wanting better, more comprehensive and more timely information on activity in New Zealand’s debt securities markets, and some of the issues and challenges around developing such a database.
New Zealand’s emergency liquidity measures during the global financial crisis (PDF 811KB)
This article discusses the steps taken by the Reserve Bank to alleviate market stress and maintain market functioning during the international financial crisis of 2007–09. Our statistical analysis suggests that the emergency liquidity policies introduced during the crisis period narrowed bank funding spreads in the domestic money market by 5-7 basis points, on average, per announcement. We also find some evidence that these policies helped to reduce the volatility of money market spreads. Collectively, these policies had a material cumulative impact, probably going well beyond the simple announcement effects on money market conditions captured by our formal analysis. This is because some of the policies were taken deliberately in a pre-emptive manner, and more generally they helped to limit broader disruption to the economy’s access to credit during the recession.
For the Record (PDF 556KB)
Recent discussion papers, news releases and publications from the Reserve Bank of New Zealand
The views expressed are those of individual authors and do not necessarily reflect official positions of the Reserve Bank of New Zealand. Articles published in this Bulletin may not be wholly or substantially reproduced without the permission of the Reserve Bank of New Zealand. Data, brief extracts from articles, and other material appearing in the Bulletin, may be used without restriction provided due acknowledgement is made of the source.
