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.
We use stress tests to:
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.
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.
2022 Bank Solvency Stress Test: Assessing the resilience of banks to a stagflation scenario
Outcomes of the 2021 Bank Stress Test
Outcomes of the 2021 General Insurance Industry Stress Test
Outcomes from a COVID-19 stress test of New Zealand banks
2017 stress test of major banks
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)