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