About the 2025 Bank Stress Test
Our industry stress tests aim to test the resilience of the financial system and participating banks to severe but plausible scenarios and improve risk management capability. This helps protect the economic wellbeing of New Zealanders.
In our 2025 bank stress test, we found that our large banks are well placed to withstand and manage the solvency and liquidity impact of a severe scenario caused by worsening geopolitical risks. Jump down to the results.
We will use the results to inform recovery planning, our policy settings and supervisors’ assessment of regulated entities.
Stress test scenarios
Scenario 1
The first scenario involved a recession in New Zealand with output declining 6.5%, issues for trade-facing businesses, unemployment peaking at 10.5% and house prices falling 35%.
Scenario 2
In the second scenario, each bank faces a severe outflow of retail deposits and closure of wholesale funding markets over 3 months during the recession described in Scenario 1. This tests the bank's ability to manage a combined stress of their solvency and liquidity, a new feature of this year’s test.
We included a third scenario, independent of geopolitical risks, that explored the effects of a hypothetical failure of a bank’s strategic transformation project (such as an IT system upgrade).
In May 2025 we published a Bulletin with details of the scenarios. Whilst they are hypothetical and do not represent our expectation of the current environment, they are relevant for testing banks’ preparedness for severe shocks.
Key insights from the 2025 Bank Stress Test
- As a small, open economy dependent on international trade and investment, New Zealand and its banking system are exposed to a range of geopolitical risks. Shocks arising from these risks can have large effects on banks’ profitability, capital, funding and liquidity. It is important to test preparedness for them.
- Large banks have built up capital levels over the past decade and are well placed to withstand a severe scenario (Scenario 1) induced by worsening geopolitical risks. However, it would take some time and significant actions to restore capital ratios to the current levels. The chart below shows the aggregate CET1 capital ratio of the largest 4 banks in Scenario 1.
- Capturing sectoral risks for businesses in banks’ credit risk models proved a challenge. The recent increases in trade tensions have made these kinds of risks more relevant. Banks should consider developing robust methodologies to assess emerging sectoral risks.
- Results from a sensitivity analysis of house prices highlighted that credit risk outcomes are not straightforward when key economic variables are adjusted. In our stress test, varying the scenario with a further 10% fall in house prices increased mortgage impairments by 40%. This underscores the importance of modelling a range of scenarios complemented by sensitivity analysis of key variables.
- Banks hold sufficient liquidity to meet the significant run-off of deposits and closure of wholesale funding markets in Scenario 2. However, for an idiosyncratic shock of this type, they would take longer to recover than in a macroeconomic stress scenario without a liquidity crisis, such as Scenario 1. The chart below shows the fall in the average one-month mismatch ratio (a measure of liquidity) for the 5 participating banks in Scenario 2.
- The results can help inform banks’ preparedness to manage the combined stress of their solvency and liquidity. Banks could make improvements in the coordination of capital management plans and contingency funding plans, and their respective committees for an idiosyncratic event.
- In Scenario 2, the Reserve Bank’s overnight borrowing facility is important for managing a sharp liquidity shock and providing stability to the financial system. However, since this is not a committed facility, banks could consider a more diversified range of funding options, particularly in a scenario where other financial entities are not under liquidity stress. From 1 December 2028, the Reserve Bank will have in place a Committed Liquidity Facility as part of the new Liquidity Standard under the Deposit Takers Act.
- Results may be used to inform recommendations to the RBNZ Board on key capital settings, the Reserve Bank’s implementation of the Deposit Takers Act 2023, and the development of recovery planning requirements.
- Scenario 3 insights highlighted the importance of maintaining strong governance of transformation projects, including third-party involvement, and having well thought out back-up plans in case something goes wrong. Stress testing could be a useful tool for managing risks for these large transformation projects.
Participation
We want to acknowledge the input of the participating banks in the stress test: ANZ Bank New Zealand, ASB Bank, BNZ, Kiwibank and Westpac New Zealand, which together account for 91% of bank lending in New Zealand. The 2025 stress test provided significant value for the participating banks and met our objectives.