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Bank solvency stress test shows resilience to a stagflation scenario

The Reserve Bank of New Zealand’s 2022 Bank Solvency Stress Test has found the New Zealand banking sector is well placed to withstand a ‘stagflation’ scenario where high inflation is paired with negative economic growth.

Our annual stress testing programme enables us and banks to better understand the implications of current and emerging risks to bank balance sheets and overall financial stability by investigating severe, but plausible scenarios, Deputy Governor Christian Hawkesby says.

The stagflation scenario modelled in the 2022 Bank Solvency Stress Test shares elements of the current economic environment. It featured a global slowdown in economic activity as central banks raise interest rates in the face of high inflation and the lingering impacts from the pandemic.

In the scenario, the New Zealand economy experiences a house price fall of 47% from its November 2021 peak, an equity price fall of 38%, unemployment rising to 9.3%, Gross Domestic Product contracting by 5%, and the OCR and the 2-year fixed mortgage rate peaking at 5.5% and 8.4% respectively.

“Although banks’ capital buffers would be reduced in such a scenario, they would still remain well above our regulatory minimum, thanks in part to the build-up of capital since the 2008 Global Financial Crisis, enabling them to continue to support their customers and the economy,” Mr Hawkesby says.

“The stress test results feed into our supervisory process for monitoring, managing and assessing risks of regulated banks. We would like to thank all of the test’s participants for their open engagement.”

This year’s stress testing programme for banks also included a liquidity stress test, and a test assessing residential mortgage portfolio sensitivity to flooding risk. The high-level results from these will be included in our November 2022 Financial Stability Report, which will be published on Wednesday.

More information

Read our Bulletin article 2022 Bank Stress Test assesses resilience of banks to stagflation

Stress testing background

Watch our video What is stress testing?

Media contact

Brendan Manning
Senior Adviser External Stakeholders
DDI: +64 9 366 2643 | MOB: 021 923 217
Email: [email protected]