Stress testing

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

As part of its prudential supervision, the Reserve Bank undertakes supervisory stress tests. These exercises involve subjecting several financial institutions to a common stress scenario, with oversight from regulators. The Reserve Bank uses supervisory tests to:

  • Investigate and understand the implications of current and emerging risks to financial stability;
  • Assess the resilience of participating banks when subject to severe stress;
  • Support improvements in the use of stress tests by individual banks to identify and manage the risks facing their business.

The Reserve Bank’s stress test framework

Developing a comprehensive stress testing framework for the New Zealand banking system has been a strategic priority for the Reserve Bank in recent years. In July 2018, the Reserve Bank published a Bulletin article outlining its approach to stress testing banks, and how it interprets test results when assessing the stability of the financial system.

Download the Bulletin article on the Reserve Bank’s philosophy and approach to stress testing (PDF 537KB)

The Reserve Bank’s framework involves a significant role for participant banks to assess the impact of stress scenarios. Banks are expected to invest in stress testing models and infrastructure, and to conduct their own internal stress tests as part of their Internal Capital Adequacy Assessment Process (ICAAP). In May 2016, the Reserve Bank issued a discussion document on stress testing methodology for New Zealand incorporated banks.

Download the discussion document on stress testing methodology for New Zealand incorporated banks (PDF 208KB)

Results of recent stress tests

The Reserve Bank reports on the implications of stress tests for the financial system in its Financial Stability Report, and occasionally provides more detailed analysis in Bulletin articles:

Reserve Bank modelling of credit risk

The Reserve Bank develops its own models to assess vulnerabilities in key credit portfolios. These models are used to understand and monitor credit risk, and to cross-check the loss rates reported by banks as part of supervisory stress tests. The following publications discuss the findings from this research:

Stress tests animated video
Stress testing
Stress tests
Stress testing is a tool to assess how banks might cope with a severe economic downturn. This video explains how stress tests work and why the Reserve Bank of New Zealand uses them in its role as prudential regulator.