Financial stability

Financial stability means having a resilient financial system that can withstand severe but plausible shocks and continue to provide the financial services we all rely on.

In order to facilitate economic growth

The financial system has a critical role in supporting economic activity. Households and businesses need avenues for saving and credit to fund consumption and investment, payment systems to facilitate local and international transactions, and insurance to manage their risks.

The public needs to be confident that banks, non-bank deposit takers (NBDTs) and insurers can and will continue to provide these services, and that the payment and settlement systems will work as expected. The continued and reliable provision of financial services to the economy is a pre-condition for ensuring that the financial system makes its maximum contribution to the prosperity and wellbeing of all New Zealanders.

Our aim is for New Zealand to have a dynamic and efficient financial system that contributes to a sustainable and productive economy.

The financial system is exposed to risks…

Risks to financial stability come from a wide range of sources, both external – New Zealand’s financial system is heavily reliant on external funding, which makes us vulnerable to dislocation in overseas funding markets – and domestic – for example risks related to lending to our dairy industry and to our already highly indebted households.

We also have to consider the vulnerabilities of our financial system. It is relatively small, and is dominated by a handful of institutions that have similar underlying business models. That means the distress or failure of one of the major institutions is likely to have significant implications for the system as a whole.

And we have to remain alert to emerging risks: misconduct, technology disruption, cybercrime, insurance affordability and climate change.

…and is subject to market failures

Financial stability is a common resource that benefits us all. It is prone to the tragedy of the commons – the risk that it is abused and degraded by individual agents who do not have the right incentives to look after it.

For example, moral hazard – where financial institutions believe the taxpayer will bail them out if they suffer significant losses – limits the incentive for institutions to manage their risks appropriately and to internalise the costs to society of a financial crisis.

This can be compounded by behavioural factors. Herd behaviour, myopia and irrational exuberance can create market momentum that drives the price of an asset or transaction away from its fundamental economic risk and return and impose costs on others.

The Reserve Bank’s objective is to promote a sound and efficient financial system.

As a full service central bank we are uniquely placed to fulfil our role in maintaining financial stability. That means that, alongside our regulatory and supervisory function, we undertake monetary policy, we oversee payment and settlement systems, and we stand ready to use our markets functions to provide liquidity in exceptional circumstances.

We also have a role in promoting a vibrant and healthy financial ecosystem. This relies on the input of a wide range of stakeholders, as well as the consumers and businesses who rely on the financial system. As a member of the Council of Financial Regulators, we work with Treasury, the FMA, the Commerce Commission and the Ministry of Business, Innovation and Employment to identify, manage and address issues, risks and gaps in the financial system, so that it is both safe and efficient.

Our regulatory and supervisory approach recognises that there is an important role for both the regulator and the regulated in ensuring that the financial stability regime is operating effectively as intended.

The three pillars

Market discipline refers to the influence that market participants have on a regulated entity’s behaviour and risk-taking, where influence is exerted by market participants changing the cost or amount of funding they are willing to provide based on financial and other information about the entity. In a functioning market this creates an incentive for regulated entities to manage their risks appropriately. Transparency initiatives, such as the Bank Financial Strength Dashboard and mandatory disclosure statements support market discipline.

Self-discipline refers to a regulated entity’s own processes and risk management frameworks, the responsibility for which lie primarily with its directors and senior managers.

Regulatory discipline – the imposition of requirements on regulated entities – is necessary to improve the effectiveness of market and self-discipline.

Fit for purpose regulation

Our role as regulator means setting robust requirements that are fit for purpose – that address risks and market failures at source, taking into account the costs of regulation and of supervision on our regulated entities and the wider economy.

We do not run a zero failure regime

Allowing institutions to fail provides the incentives for self- and market-discipline to operate effectively. Achieving financial stability does not mean eliminating all risks. This would create inefficiencies – it could stifle new entrants, and remove the incentives for growth, innovation and healthy risk-taking.

However, in order to allow individual institutions to fail we need a robust financial system that can continue to function even when individual entities are experiencing distress or fail.

Our role is dynamic

The financial system is constantly evolving, as are the risks and challenges. This means that our requirements and expectations of regulated entities evolve as well.

The Reserve bank's approach to financial stability

The Reserve Bank’s approach to financial stability is evolving and is becoming more intensive and more intrusive in terms of both regulation and supervision.

The Reserve Bank monitors the financial system, enhances its resilience and manages the consequences of institutional distress or failure.

Financial Stability Approach

The Reserve Bank continuously monitors the financial system to identify and assess:

  • Structural risks: ever-present risks related to the composition of the financial system, in terms of its institutions, and their assets and funding. New Zealand is exposed to external shocks and standards must recognise these risks and shield the domestic system and economy.
  • Emerging risks: these can be risks related to traditional areas of focus like credit or funding risks, or to new and emerging technologies or to climate change. We are particularly focused on innovation that presents risks to the regulatory perimeter – whether institutions are operating inside or outside our supervisory and regulatory reach, and whether this is appropriate.
  • Cyclical risks: the risk that boom-bust cycles are amplified by, and to the detriment of, the financial system, due to the procyclicality of credit and asset price growth.

We publish our assessment of risks in the Financial Stability Report both to increase awareness and so that institutions can adapt and develop resilience, and improve their self-discipline.

Our Bank Strength Dashboard promotes self- and market discipline by making a wide range of financial information about banks more accessible.

Thematic reviews, where we delve into the detail of specific issues, help us and our regulated entities better understand specific risks.

Stress testing, where we subject individual institutions to a significant yet plausible downturn in the economy and distressed funding markets, help us to understand the system’s resilience to macro risks. They also help institutions understand risks and assess their risk management frameworks.

We enhance the resilience of the financial system by establishing rigorous baseline requirements that address enduring and identifiable sources of risk to the financial system. For example:

  • liquidity standards for banks are important in ensuring they can meet their cash flow demands;
  • solvency standards for insurers are important in ensuring they can afford to pay claims; and
  • capital requirements for banks and non-bank deposit takers (NBDTs) allow them to absorb unexpected losses and to continue lending to households and businesses.

For more detail on our requirements for each sector see:

The Reserve Bank also oversees Financial Market Infrastructure.

We then adapt our regulatory and supervisory approach to reflect emerging and/or cyclical risks and the impact they could have on the financial system.

If cyclical risks become excessively heightened for banks we can enhance resilience by using LVRs to enhance the resilience of bank and borrower balance sheets and/or other macroprudential tools to enhance banks’ capital and/or liquidity ratios. The government is consulting on the Reserve Bank’s role in macroprudential policy, including the use of LVRs (see ‘Phase 2’ below).

Our regulatory requirements are complementary and they aim to support effective self and market discipline by providing a basis for directors and the market to assess the well-being of individual institutions.

Despite our efforts to monitor and enhance the resilience of the financial system, institutions may become distressed and even fail. These events, if and when they do occur, need to be managed in order to maintain critical payments and services and to mitigate costs to depositors, investors and taxpayers.

For more information see the crisis management page.

The government has announced the ‘in principle’ decision to introduce a deposit protection regime that, in the event of failure of a deposit taking institution, would provide that deposits in the range of $30,000- $50,000 were insured. It is consulting on the features New Zealand’s bank crisis management regime should have (see ‘Phase 2’ below).

As a full service central bank, the Reserve Bank stands ready to provide liquidity (as the lender of last resort) in situations where a cash shortfall threatens the viability of solvent banks and causes a significant tightening in credit supply.

For more information visit the Domestic Markets page.

While a robust regulatory approach gives us confidence in the financial system and its stability, it does not imply a lower level of supervisory intensity. Our supervisory approach is intended to complement our regulatory approach in terms of its reach, and its intensity.

Supervision plays a key role:

  • monitoring, and deepening our understanding of, the financial system and the risks it faces;
  • enhancing the resilience of the financial system by:
    • verifying that self and market discipline are operating as intended;
    • that regulated entities are complying with requirements; and
    • enforcing requirements where they are not met;
  • managing the consequences of the distress or failure of institutions by:
    • providing intelligence on balance sheets, operations and the risks facing institutions;
    • working closely with institutions on their recovery and resolution plans; and
    • having a clearly articulated ladder of supervisory intervention.

An intensive approach means working closely with industry. We are committed to establishing a ‘best regulator-regulated’ relationship; to open, knowledgeable and constructive discussions, recognising that there can be a divergence of views and interests. More detail can be found on our regulatory and supervisory approaches page.

In November 2017 the government announced a substantial review of the Reserve Bank of New Zealand Act, with the aim of modernising the Reserve Bank’s monetary (phase 1) and financial policy (phase 2) frameworks. As part of Phase 2, the government:

  • has announced its ‘in principle’ decisions to (among other things):
    • keep responsibility for prudential regulation with the Reserve Bank;
    • replace the Reserve Bank’s existing ‘soundness and efficiency’ financial policy objective with a single high-level objective to ‘protect and enhance financial stability’
    • establish a new governance board with statutory responsibility for all Reserve Bank decisions (except those reserved for the Monetary Policy Committee);
    • unite the separate regulatory regimes for banks and NBDTs into a single ‘licensed deposit taker’ framework;
    • introduce a deposit protection regime that, in the event of failure of a deposit taking institution, would provide that deposits in the range of $30,000- $50,000 were insured;
  • is consulting on (among other things):
    • the prudential tools and powers the Reserve Bank should have;
    • the Reserve Bank’s role in macroprudential policy (including the use of LVRs);
    • how the Reserve Bank should supervise and enforce prudential regulation;
    • whether the Reserve Bank’s role as lender of last resort needs to be clarified; and
    • what features New Zealand’s bank crisis management regime should have.

A third and final consultation is expected to take place late in 2019 before final recommendations are delivered to the Minister of Finance.

The Reserve Bank publishes a six-monthly Financial Stability Report (FSR). In the FSR we assess and report on the soundness and efficiency of the New Zealand financial system. The Bank published its first FSR in October 2004.

This information is designed to provide a broad overview of the structure of the New Zealand financial system and background information for the Financial Stability Report (FSR).

A stress test models the effect of a severe but plausible scenario on the balance sheet of a financial institution.

Climate change will have a significant effect on New Zealand’s economy and financial system. The Reserve Bank has a strong interest in climate change, as understanding, quantifying and managing major risks is critical to many of its core functions.



Following the Global Financial Crisis, there was considerable international focus on reducing risks to the financial system. This led to the development of a policy approach known as macro-prudential policy, which uses prudential instruments to manage the system-wide (systemic) risks that can develop during boom-bust financial cycles.