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Financial system coping well with international stresses

Global economic and financial conditions continue to pose risks for New Zealand's financial system, Reserve Bank Governor Alan Bollard said today when releasing the May 2012 Financial Stability Report.

"Financial market sentiment has improved since the start of 2012, largely reflecting policy measures in Europe which have helped to mitigate the effects of softening economic growth, stretched sovereign debt positions and weak bank balance sheets. However, the situation remains fragile given limited progress in addressing Europe's underlying issues.

"In New Zealand, households remain cautious and have been saving more while business investment has been weak. Private sector indebtedness has declined, although this has largely been offset by rising public debt.

"Growth in most advanced economies remains weak and there have been recent signs of slowing in Australia and China. Commodity prices have eased in recent months which could create financial pressures for some primary exporters if sustained."

Deputy Governor Grant Spencer said the soundness of the NZ banking system continues to improve despite considerable international volatility, while credit demand is weak.

"Encouragingly, international debt markets have freed-up over 2012 with term funding now available again, although the cost remains elevated. A strong inflow of retail deposits has enabled banks to lift their domestic funding shares and minimise offshore funding use. All banks are now meeting the Reserve Bank's Core Funding Ratio by a comfortable margin and we have confirmed our intention to lift the ratio from 70 percent to 75 percent in January next year.

"The Reserve Bank is continuing to strengthen regulation of the financial system, drawing on lessons from the financial crisis. We have recently reviewed submissions on our Basel III capital proposals and will shortly release modified standards for further industry review.

"In other areas, we are progressing a new legislative framework for covered bonds and continuing work on the pre-positioning of banks' systems for Open Bank Resolution. In the insurance sector, the provisional licensing regime came into force on 7 March, with 105 insurers licensed to conduct business on that date."

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