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Explainers

How we check banks and insurers can cope in tough times

Why we stress test banks and insurers to see how they would cope in stressful economic situations, and what this means for you.

Published:

About stress testing

If you have savings in the bank, or insurance for your house, car or contents, you might be wondering if banks and insurers are prepared for the “what if”? Things like:

  • a sharp fall in house prices
  • a major natural disaster, or
  • a global conflict.

We keep a close eye on all banks and insurers to see how they would cope in severe economic situations. Our stress tests check whether they are strong enough to get through tough or unexpected “what if” scenarios while contributing to a sound financial system.

If a tough or unexpected situation happened tomorrow, how would New Zealand’s banks and insurers cope?

What if there were a recession, a global conflict, a major storm, or rising insurance claims? What would that mean for New Zealand’s financial system?

Here at the Reserve Bank of New Zealand, we regularly ask banks and insurers these questions.

We call this ‘stress testing’ - where we ask what would happen in various “what if” scenarios that could play out in real life.

From economic downturns where people might struggle to pay their mortgages, to major disasters like climate-related weather events, to sharp increases in life and health insurance claims.

Asking these ‘what ifs’ helps us understand how New Zealand’s institutions would cope, and whether they would continue to operate if the worst were to happen.

If we find weak spots during these tests, we may review our rules for banks and insurers - so New Zealand is prepared for any challenges ahead.

Stress testing ensures your everyday financial services remain reliable – so you know your insurance claims can be paid, banks can keep lending even in hard times, your deposits stay safe, and the wider financial system is stable.

Most of us hope for the best but plan for the worst – and that’s what stress testing does.

Visit rbnz.govt.nz to learn more.

Who we stress test

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Banks

Large and small banks in New Zealand.

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General insurers

Like those that offer property or income protection.

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Life and health insurers

The largest life and health insurers in New Zealand.

Why we stress test and what this means for you

Stress testing helps us check whether banks and insurers could cope with serious shocks and what happens as a result, like many people defaulting on loans or a sudden surge in insurance claims.

Stress testing helps make sure

  • your savings remain protected
  • your mortgage is secure and banks can continue to lend
  • your insurance pays out when you need it most, and
  • the financial system keeps running, even in difficult conditions.

If a large bank or insurer were to fail, it could affect thousands of New Zealanders and undermine confidence in the entire financial system.

Stress testing is one of the key tools we use to keep New Zealand’s financial system resilient and ready for the unexpected.

Your questions on stress testing answered

We create a hypothetical stress testing scenario. The bank or insurer then looks at what will happen to their balance sheet and if they can keep operating. Insurers also check whether they have enough money to pay claims from their customers (policyholders).

Find out more about our stress testing programme.

The banks and insurers use the results to manage risk and set aside enough money (for example, capital to absorb losses during economic downturns and liquidity buffers to cover large deposit withdrawals).

If we find weak spots during these tests, we may review our rules for banks and insurers - so New Zealand is prepared for any challenges ahead. We also look at the results across the whole system to see how New Zealand’s financial sector would hold up together.

We have used results from our stress tests to help with:

No. Stress tests aren’t pass or fail exercises. They’re learning tools – for us, and for the banks and insurers themselves.

The insights we gain help banks and insurers to strengthen their balance sheets, better prepare for tough conditions, and become more resilient to future shocks.