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Stress testing regulated entities

Stress testing assesses the resilience of banks and insurers to severe but plausible risks, including economic downturns. The results of stress tests help us monitor financial stability and our policy decisions and also help entities manage risk and set capital and liquidity buffers.

Why we stress test

We use stress 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 how individual banks use stress tests to identify and manage the risks facing their business.

Our stress test framework

We have a comprehensive stress testing framework, which involves participating banks having a significant role in assessing the impact of stress scenarios.

We expect banks to invest in stress testing models and infrastructure, and carry out their own internal stress tests as part of their Internal Capital Adequacy Assessment Process (ICAAP).

In July 2018, we published a Bulletin article outlining our approach to stress testing banks, and how we interpret test results when assessing the stability of the financial system.

In May 2016, we also issued a discussion document on stress testing methodology for New Zealand incorporated banks.

Results of recent stress tests

We report on what the results of stress testing means for the financial system in our 'Financial Stability Report'. We also provide more detailed analysis in the following bulletin articles:

Outcomes of the 2021 Bank Stress Test (2021 Bulletin article)

Outcomes of the 2021 General Insurance Industry Stress Test (2021 Bulletin article)

Outcomes from a COVID-19 stress test of New Zealand banks (2020 Bulletin article)

2017 stress test of major banks (including datapack) [2017 Bulletin article]

Our modelling of credit risk

We have developed our own models to understand and monitor credit risk in important credit portfolios. We also use the models to check the loss rates that banks report as part of our supervisory stress tests.

The following publications in our document library discuss the findings from this research:

Analysis of household sector vulnerabilities to higher mortgage rates (2017 Financial Stability Report)

Assessment of dairy sector vulnerabilities using DairyNZ data (2015 Bulletin article)

Assessment of dairy sector vulnerabilities using granular data from banks (2011 Bulletin article)

Project TUI: A structural approach to the understanding and measurement of residential mortgage lending risk (Financial Stability Report, 2008 research paper)