Financial Stability Report for November 2020

Financial Stability Report in pictures

Financial stability supported by fiscal and monetary policy responses

The New Zealand financial system entered the downturn with strong buffers and significant fiscal and monetary support has allowed these buffers to be maintained.

Fiscal and monetary support have prevented a substantial rise in unemployment

Significant downside risks remain, and some sectors will face continued stress

The financial system has been insulated from significant stress so far

Banks need to keep supporting customers and the economic recovery

We intend to reinstate LVR restrictions to manage risks from high-risk housing lending

Reserve Bank supports efforts to improve disclosure of climate risks

Fiscal and monetary support have prevented a substantial rise in unemployment

The Government’s fiscal support, in particular the wage subsidy scheme, has stabilised the labour market and household incomes. The Reserve Bank has continued to ease monetary policy to support demand in the economy and alleviate financial pressures on businesses and households, including through the expansion of its Large Scale Asset Purchase programme and recent announcement of a Funding for Lending Programme.

These support initiatives have been crucial to ensure that the short-term impacts of economic lockdown did not result in longer-term disruption. Domestic economic activity rebounded relatively quickly as the country moved to lower Alert Levels. Business failure rates have remained at very low levels to date, and unemployment has not risen to the extent initially feared.

Significant downside risks remain, and some sectors will face continued stress

Although New Zealand has been successful so far in managing the pandemic, there is considerable uncertainty about the economic outlook. The continued spread of COVID-19 around the world, the ongoing closures of international travel links, and the risk of further domestic outbreaks, are weighing on businesses’ investment intentions.

To date, the economic stresses faced by businesses and households have yet to show up in banks’ non-performing loan metrics. As government support schemes wind down and payment deferrals come to an end, banks are likely to see a deterioration in their loan books. It will be important for banks to recognise bad loans promptly and work with their customers to resolve them.

The financial system has been insulated from significant stress so far

New Zealand’s banking system entered the current downturn with strong capital and liquidity buffers, having built these up over the decade following the global financial crisis, and generally simple business models that generate strong and stable earnings. Support measures have meant the performance of banks’ loans has remained high to date. Banks have increased their provisions to prepare for a rise in loan losses.

Strong capital buffers allow banks to maintain credit growth during stress events. Based on recent Reserve Bank stress tests, banks’ current capital positions would allow them to survive severe but plausible economic shocks, whilst maintaining credit supply to businesses and households.

Banks need to keep supporting customers and the economic recovery

The financial system, and in particular banks, play a crucial role in supporting the economy through periods of uncertainty and volatility. Bank credit currently remains available to banks’ existing creditworthy borrowers, but standards have tightened for new business borrowers and some business sectors acutely affected by the pandemic.

Banks’ continued provision of credit to sound businesses and households is the best contribution they can make to supporting the economic recovery. To facilitate this, the Reserve Bank has further extended the implementation of the Capital Review, is continuing to provide the financial system with ample liquidity, and has committed to an extended period of stimulatory monetary policy.

We intend to reinstate LVR restrictions to manage risks from high-risk housing lending

Despite the large decline in economic activity earlier in the year, housing market activity and housing credit growth have rebounded strongly. A growing share of this lending is going to borrowers with low deposits, making these borrowers’ balance sheets more vulnerable to a correction. If this trend were to continue, the stock of low-deposit home loans on banks’ books would gradually rise to a level that would constitute a risk to financial stability.

As a result, the Reserve Bank intends to reinstate loan-to-value ratio (LVR) restrictions in early 2021. Putting LVR restrictions back in place would improve the resilience of households and banks to a future housing market downturn.

Reserve Bank supports efforts to improve disclosure of climate risks

Climate change presents a significant longer-term risk to financial stability. The Reserve Bank supports efforts to assess, manage and disclose climate-related risks. A recent announcement by the Government introducing a mandatory climate-related financial disclosures regime is a positive development.

The Reserve Bank will repeat a survey on the implementation of climate-related disclosure next year to assess the progress financial institutions are making in this area.