Stress tests serve an important purpose for regulators and financial entities. They provide a forward-looking lens for assessing the resilience of an entity's balance sheet to severe but plausible scenarios and whether the risks pose systemic concerns. The output from stress tests can be used by regulators to monitor financial stability, inform policy decisions, and inform supervisors of major risks to regulated entities feeding into their risk assessments. They can be used by banks for risk management, capital and liquidity buffer setting, and strategy and investment decisions.
This year’s stress test will help us assess our largest banks’ resilience to the risks from heightened global tensions. The Reserve Bank’s 2025 bank industry solvency stress test includes two severe but plausible scenarios featuring an escalation of current geopolitical-related economic risks.
Scenario 1 is a geopolitical shock resulting in global economic stress. Waves of protectionist and retaliatory policy measures overseas bring about a disorderly disruption of international trade, technology transfer, financial flows, and cross-border movement of people. This results in a severe slowdown in global economic activity and stressed financial conditions. New Zealand’s economy shrinks by 6.5 percent over three years.
In Scenario 2, each bank faces the same geopolitical-related economic stress as Scenario 1. In addition, each participating bank experiences a ‘name crisis’ event that could also eventuate from geopolitical stress. This causes a significant deposit outflow and loss of access to wholesale funding markets (while other banks are unaffected). Banks’ resilience will be tested to a combined stress of their liquidity and capital.
The table below shows New Zealand’s largest export categories by negative direct impact from trade barriers and supply chain problems in the scenario, from low-impact to high-impact on an indicative basis (the categories in the table cover approximately 85 percent of New Zealand’s exports). The impact summarised here is separate to price effects from weak global macroeconomic conditions.
The scenarios are hypothetical and designed to test 'tail risks'. We aim to publish a summary of results and insights from the stress test in November of 2025.
Negative impact of trade barriers and/or supply chain problems on NZ exports (in scenario)
