New Zealand's financial and payments systems have held up well in the face of extreme disorder within the international financial markets, Governor Alan Bollard said today, when releasing the Bank's November 2008 Financial Stability Report.
"While we are far from seeing the final impact of the financial and economic disruption, New Zealand's banks, and the Australian parents of the majors, are well-positioned to withstand the economic downturn," Dr Bollard said.
Dr Bollard said that New Zealand's banks have not experienced the significant financial losses affecting financial institutions in the United States and Europe.
"Also, they have sufficient capital buffers to withstand the higher loan losses that will inevitably result from the economic downturn.
"However, recent global market conditions have affected the cost and accessibility of offshore funding that our banks – and the country – rely on heavily."
Measures undertaken by central banks and governments around the world have contributed to some improvement in market conditions over recent weeks. New Zealand has also adopted a range of policy measures to help reduce financial and economic risks.
Deputy Governor Grant Spencer said the retail deposit guarantee scheme that the Government announced in October assures New Zealanders that their deposits are safe. The wholesale guarantee scheme announced in early November is aimed at facilitating the re-entry of financial institutions to offshore wholesale debt markets.
"These schemes are a temporary response to exceptional circumstances. While some distortions are inevitable, the Government has tried to reduce these distortions through the use of risk-based pricing and other features. The Bank will also monitor and supervise the guaranteed institutions more intensively, and will accelerate implementation of the new non-bank prudential regime.
"Recently we issued a consultation document on proposed new standards for the banks' management of their funding and liquidity. When finalised, this policy will reinforce incentives on banks to diversify away from short-term wholesale funding and reduce their vulnerability to credit market disruptions."
Mr Spencer said banks have been constructing Residential Mortgage Backed Securities following the Reserve Bank's announcement in May that it will accept these securities in its domestic market operations. "A number of banks now have these securities in place. This will enable us to maintain liquidity in the banking system if the offshore funding channels continue to be disrupted."
Dr Bollard noted that a slowing in the economy had been reflected in an easing in credit growth, and savings appeared to be improving, particularly in the household sector. Together with the decline in the exchange rate, this is expected to improve New Zealand's external balance and reduce the need for foreign borrowing over time.
"However, global developments have proven extremely disruptive and it will likely be some time before financial market conditions normalise. The Bank will continue to adopt measures as needed to maintain the stability of our financial system as far as possible in these difficult times."
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