Financial stability

One of the Reserve Bank’s core functions is to promote a sound and efficient financial system.

There are a number of ways the Reserve Bank helps to maintain financial stability, including through the regulation and supervision of banks, non-bank deposit takers and insurers, promoting the smooth operation of financial markets, and building sound financial market infrastructure.

It is also important to understand developments that could make the financial system vulnerable to instability, and respond appropriately. The Reserve Bank conducts regular surveillance of financial risks and reports on its assessments in the six-monthly Financial Stability Report.

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.
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.
The Reserve Bank monitors a range of indicators to inform its assessment of financial system risk, and to assist in appraising whether a policy response is appropriate. The chart pack, updated quarterly, presents some of the key macro-prudential indicators.

Temporary limits on high loan-to-value ratio (LVR) residential mortgage lending have been in place since October 2013. The restrictions have been revised over time.

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.

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).