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Financial Stability

Protecting and promoting the stability of New Zealand’s financial system

Financial stability means having a strong and resilient financial system that provides the financial services we all rely on, even when under stress.

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Why financial stability is important

The financial system has a critical role in supporting economic activity. Households and businesses need:

  • services for savings and credit to pay for spending and investment
  • payment systems to make it easy for them to transact here and overseas
  • insurance to manage their risks.
Households and businesses need to be confident that banks, non-bank deposit takers and insurers will continue to provide these services. They also need to be able to rely on the payment and settlement systems to work as expected.
 

Our financial system is exposed to risks every day

Risks to New Zealand’s financial stability come from a wide range of sources:

  • overseas (external) — for example, New Zealand’s financial system relies heavily on external funding making us vulnerable to disruption in overseas funding markets
  • domestic (internal) risks — for example, lending to our dairy industry and to highly indebted households, particularly where the procyclicality of credit and asset price growth amplifies boom-bust cycles
  • vulnerability due to the small size of our financial system and dominance of a small number of banks with similar business models. If one of these banks failed or was in distress, it would be likely to impact the whole system
  • emerging risks including technology disruptions, cybercrime, insurance affordability and climate change.

Our role in maintaining financial stability

As a full service central bank, Te Pūtea Matua promotes and protects the stability of the financial system in a range of ways:

  • we regulate and supervise financial institutions and payment and settlement systems
  • we use our markets functions to provide liquidity in exceptional circumstances.

Our stakeholders

Our efforts to promote a strong and resilient financial ecosystem are supported by input from a wide range of stakeholders.

As a member of the Council of Financial Regulators, we work with Treasury, the Financial Markets Authority, the Commerce Commission, the Ministry of Business, Innovation and Employment (MBIE) and our industry stakeholders to identify, manage and address issues, risks and gaps in the financial system.

Our tools 

We continuously monitor the financial system to identify and assess risks and have a wide range of tools for protecting and promoting financial stability.

Financial Stability Report

We publish our assessment of risks every six months in the Financial Stability Report to raise awareness of risks and help institutions develop resilience and improve their self-discipline. 

Financial Stability Report

Regulatory framework

We make the financial system more resilient by setting strong baseline requirements to manage ongoing and identifiable sources of risk — for example:

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

Our approach to policy

Supervision of regulated entities 

We monitor compliance of regulated entities with our requirements, as well as working with them to enhance their risk management and resilience.  We adapt our regulatory and supervisory approach to reflect emerging and/or cyclical risks and the impact they could have on the financial system.

Our approach to supervision


Thematic reviews help us and our regulated entities better understand specific risks.

Our thematic reviews

Stress testing is where we subject individual financial institutions to stresses (such as a significant economic downturn and distressed funding markets) to help us understand how resilient the financial system is to big risks. Stress tests also help financial institutions understand risks and assess their risk management frameworks.

 

Stress testing regulated entities

We also use macroprudential tools like loan-to-value (LVR) ratios to improve the resilience of the balance sheets of both banks and borrowers to help manage cyclical risks. We have other macroprudential tools for improving banks' capital and/or liquidity ratios. 

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

Bank Financial Strength Dashboard

How we manage distress or failure

While we set robust requirements for our regulated entities, we do not try to eliminate all risks. 

We do not run a zero-failure regime. We are prepared to tolerate risks that may lead to the failure of regulated entities where the impact on the financial system is understood, and we can use our tools to avoid significant damage to the financial system.

Our approach to enforcement and resolution


Enforcement gives regulated entities and the public confidence that our regulatory and supervisory framework is being implemented, in line with our approach to achieving our purpose and objectives. It supports regulatory discipline and, in so doing, provides incentives for self- and market-discipline to operate effectively. 
Our focus is on making sure New Zealand has a strong and resilient financial system that can continue to work even when individual entities are experiencing distress or failing.

When institutions become distressed and even fail, we aim to make sure this is controlled and managed in a way that maintains critical payments and services and mitigates costs to depositors, investors and taxpayers. This is known as resolution. 

More information about resolution

A proposed Depositor Compensation Scheme will allow consumers to have confidence that their deposited funds are safe in the event of the failure of a deposit-taking institution, up to a total of $100,000 per institution, per depositor.

Depositor Compensation Scheme

We can provide liquidity (as the lender of last resort) when a cash shortfall threatens the viability of solvent banks and causes a significant tightening in credit supply.

Domestic markets

More information

Our Statement of Prudential Policy

Renewing the Reserve Bank of New Zealand's approach to financial stability — 2019 speech by Former Deputy Governor Geoff Bascand