Stress tests serve an important purpose for regulators and regulated 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.
Our three-year stress test plan outlines the 3 stress tests that we will conduct in 2026.
Trans-Tasman Stress Test (TTST)
The 2026 large bank stress test is a joint exercise conducted by the Reserve Bank and the Australian Prudential Regulation Authority (APRA). APRA is responsible for regulating and supervising Australian banks.
The ‘Trans-Tasman Stress Test’ (TTST) includes New Zealand’s 4 largest banks. These banks - ANZ NZ, ASB, BNZ, and Westpac - make up 84% of lending in New Zealand. Their Australian parent banks are also included. Assets of the New Zealand subsidiaries make up around 10% to 15% of the total assets of their respective Australian owners.
This is the first joint test since 2017, and it is designed to:
- assess capital resilience
- understand how geopolitical shocks could transmit across borders
- strengthen parent-subsidiary responses in stress
- inform supervisory risk assessments, and
- enhance Trans-Tasman stress testing capability.
Banks model the impact of a severe but plausible scenario on capital over 5 years. They then compare the results to the regulatory requirements in each country.
What the TTST scenario covers
The hypothetical scenario is set against heightened geopolitical risk. A long conflict in the Middle East and the effective closure of the Strait of Hormuz drives oil prices up to around US$160 per barrel. This rise disrupts global supply chains.
This leads to higher inflation, tighter financial conditions, and market volatility. Major economies like the United States and China slow down sharply. Then, a gradual and uneven global recovery begins in Year 3. In New Zealand, higher energy and fertilizer costs push inflation well above target. This leads to the OCR peaking at 4%. By Year 2, a severe recession hits, with GDP shrinking by 5.7% and unemployment soaring to 10.5%. Property prices, both residential and commercial, also drop significantly.
The scenario also includes:
- credit rating downgrades
- higher wholesale funding costs
- compressed bank profitability, and
- the failure of a large corporate borrower.
Energy-intensive industries face the worst impacts. This includes chemicals, manufacturing, transport, horticulture, fishing, forestry, and dairy. In these sectors, fertilizer costs rise sharply. A climate risk sensitivity tests higher insurance premiums for the most flood exposed properties.
Smaller Bank Stress Test
We are conducting a second bank solvency stress test in 2026, which involves 9 smaller (‘Group 2’) banks. The smaller bank solvency stress test is conducted every second year. This stress test makes use of the large bank stress test from 2025 as the basis of the scenario. Participants will estimate the effect of one scenario. This is in contrast to the 3 scenarios for larger banks in 2025. They can also benchmark their results to aggregate or average results from that stress test. The aim of this stress test is to assess how smaller banks can manage a combined stress of their solvency and liquidity.
What the scenario covers
The stress scenario assumes worsening geopolitical stability across several regions. There is a broad fragmentation of trading and security relationships. Disruptions to global supply chains cause a drag on productivity and reduced business and consumer confidence, and lead to a severe slowdown in global economic activity and stressed financial conditions.
The scenario also includes a bank facing a ‘name crisis’ event (a crisis of confidence in the specific bank). This leads to a large outflow of deposits and a loss of access to wholesale funding markets. This occurs in the first quarter of the second year. Each bank models the scenario assuming that it is the bank affected by the name crisis event and other banks are not directly affected. This tests the bank's ability to manage a combined stress of its solvency and liquidity. This will be the first time most participating banks model solvency and liquidity stress together. This feature was part of the 2025 stress test for larger banks.
Life and Health Insurance Stress Test
The 2025/26 insurance industry stress test is a reverse stress test (RST). The 8 participating insurers represent a majority of New Zealand’s life and health insurance sectors. This level of coverage enables assessment of both entity-specific and system-wide financial stability risks.
The objectives of the RST are to:
- identify risks that can cause significant stress to insurers
- inform recovery planning and assess effectiveness and triggers for mitigating actions
- improve insurers’ risk management capability, and
- inform supervisors of the major risks, mitigants and capabilities of regulated entities to feed into supervisory risk assessments.
What the reverse stress test scenario covers
The RST is different from our usual stress tests. Those tests use a common severe, but plausible scenario for all participants. The 2022 life insurance stress test used one scenario. This included an economic shock, an insurance shock from long COVID, and a new pandemic. Insurers traditionally estimate how this impacts their balance sheets, profit, and solvency ratios. They use their own models but follow a common set of instructions.
In contrast, the RST does not prescribe a single scenario. Instead, we provided guidance on scenario design. This lets insurers create their own severe but plausible scenarios. More prescriptive guidance applies to health insurers, reflecting ongoing concerns that claims costs may increase at a rate exceeding wage growth and general inflation. This trend may place sustained pressure on profitability and create uncertainty regarding the adequacy and acceptability of premium increases for policyholders and employers.
Under the RST methodology, the outcome − a breach of the minimum solvency margin − is predefined. Insurers are required to work in reverse to identify a severe but plausible scenario to achieve this set outcome. Along with the RST, we're also gathering qualitative data on insurers' stress testing practices. This includes their governance frameworks, scenario design, methodologies, how they apply results, and key challenges. This information will help us understand the range of tail risks that insurers consider. It also shows how mature stress testing practices are in the industry.