Financial Stability Report November 2024

Christian Hawkesby: 

Kia ora koutou katoa. Nau mai haere mai. Nau mai haere mai ki Te Pūtea Matua. Nau mai haere mai ki te hui tenei ra. Ti hei mauri ora. 

So good afternoon. Welcome, welcome to the Reserve Bank and welcome to this Hui to discuss this document here, the financial stability report that we put out every six months. I'm Christian Hawkesby, Deputy Governor here at the Reserve Bank and General Manager of Financial Stability. Joined on the stage with Jess Rowe, Director Prudential Policy, Chris McDonald Manager Financial System Monitoring and Analysis, and of course the Governor Adrian Orr. I just want to also acknowledge a number of my colleagues and the audience who have been key authors of this document. Financial stability matters because it provides trust and confidence for Kiwis to get on and safely save, borrow, and manage risk, and this underpins our economy and society.

Our assessment is that the New Zealand financial system remains well positioned to navigate the challenges both current and future. Back when we were here six months ago in May we talked about a risk scenario which was higher inflation globally in the impact that that may have on the financial system. Since then, global inflation pressures have abated. Policy rates both globally and New Zealand have fallen as have interest rates for households and businesses and this is providing some relief. However, domestic economic conditions do remain challenging. Some households and businesses continue to do it tough and unemployment is expected to rise over the short to medium term. There are also a number of evolving risks both domestically and globally and in the report we call out geopolitical tension as being one of those in particular and outline a framework to consider how this traces back to financial stability here in New Zealand.

We are confident that the New Zealand banking system is resilient and well positioned to face these challenges into the future and continue to support the customers and clients through both good times and bad. We are supportive of the efforts to increase competition in New Zealand's banking system. We have never had a fuller work agenda to contribute to this important cause, both through our role as a prudential regulator and more generally through our role as a central bank and the influence we have through the leadership we provide on the future of payments, the future of cash and the future of money more generally that are going to be key contributors to that landscape going forward. The implementation of the Deposit Taker Act is in full swing through the course of this year with issuing consultations on standards and going into next year we are on track to launch the deposit compensation scheme mid 2025.

So I think we're in a position now to open it up for questions. Just as always, if you could direct those initially through me and I will draw in the team as required. Also a reminder that a few of us are back here in a couple of weeks with our next official cash rate decision, so we'll hold off our monetary policy discussion till then. But with that as way of background, we will take questions and there's a couple of roving mics in the audience understand. Welcome to all of you online. I understand that there are questions coming through online as well. Thank you.

Media questions

Media

Hello, Jenée Tibshraeny from the Herald. Would you please be able to talk us through what the implications are for the different possibilities of the US election in terms of the impact on financial stability here in New Zealand?

Christian Hawkesby

Thank you. So the document does major on geopolitical risk and tensions and this is very topical with the US elections as we speak and we see that as one illustration of the many types of geopolitical tensions there are out there. Over recent years we've felt it through the war in Ukraine, conflict in the Middle East trade tensions between US and China. We don't attempt to forecast who's going to win the US elections or outline exactly what their stated policies are. It's more an illustration of the geopolitical tensions that can rise and that can escalate from where we are now depending on what policies do get implemented and what responses there are from other countries.

The key message from our document is that geopolitical tensions do really matter. They're more than a political sideshow. They traced their way through many channels. So when we did our reverse stress test with the industry, they six out of 13 of those who participated provided geopolitical risk as a key element of the type of scenario that would put them under stress. And that makes sense when you see the different channels, economic confidence funding financial market channels that this can work through. For us it's all about ensuring that we build a level of resilience into the financial system that can cope with those different scenarios and we've taken comfort from the stress testing results that have come through on that.

Media

How would the policies under a Trump administration be different to one under a Harris administration impact on financial stability?

Christian Hawkesby

Well, both political candidates in the US do have trade policies that are more restrictive that are currently in place globally, so that's a key example of an area of tension that could rise and could see further escalation internationally. So that's one of many ways that the US election may affect that outlook going forward. Just to reiterate, the US election is just one of many geopolitical tensions that are out there. They have been ever present. You think back to the biggest geopolitical event in New Zealand's modern history is probably the UK joining the EU back in 1973 and the way that that reshaped the economic landscape and financial landscape and the way everyone had to navigate their way through that period.

Media

The commentary in here, Lucy from Reuters, the commentary in the document seems unusually bleak. Has the situation changed in the last four weeks, in the last 10 weeks and should we be more worried than we were say in August?

Christian Hawkesby

So this is our financial stability report. This is our opportunity every six months to put our black hats on and imagine all of the bad things that could happen out there. So it is a document that is naturally focused on scenarios and adverse scenarios that we may be faced with. I don't think that there are any more rosy or bleak than in the past. The key thing is we are looking for the types of tests and challenges to the financial system and whether we've got the resilience to weather those. 

Media 

So things haven't worsened. Then in the last three months?

Christian Hawkesby

Well six months since we last put out our financial stability report, as I mentioned in the opening six months ago, the big risk out there seemed to be higher inflation globally and the impact that that would have through potentially higher interest rates and parting even more pain on global and domestic economies and the way that that might trace its way through to the financial system roll forward six months, that risk has abated, other risks have become more prominent. I think the other key aspect of this document is just keeping that long-term horizon. There are many longer term risks, the impact of climate change and other structural factors that are going to be ever present and which are we always need to be focused on.Media

But obviously the central bank continually looks at the economic outlook. Has it got worse in the last three months?

Christian Hawkesby

We'll be back here in a couple of weeks to give you our central forecast for the economy.

Media

Hi Tom Pullar-Strecker from the post noted in the report that the bank said it would be considering geopolitical risks scenarios for next year's industry stress tests. Are you going to be asking banks to very specifically model for a particular scenario? I mean for example, I guess elephant would be a Chinese block blockade or invasion of Taiwan. I mean does it help, is it useful? Is it necessary for you to be specific about the type of thing you're modelling for or can you sort of in your view be more generic?

Christian Hawkesby

Yeah, I'm going to bring in my colleague Chris in a moment just for the benefit of others. We do have a stress testing programme that we run over a number of years. The stress test that we've done this time around is a unique one in the sense of instead of laying out a scenario, we've asked the institutions to say what's the scenario that breaches the regulatory minimums, but the results of this scenario are motivating a design going forward. And Chris, do you want to talk a bit more about that?

Chris McDonald

Yeah, I just refer it to the box that we put out there on the geopolitical risks and some of those transmissions channels that are noted there. Any scenario we design will highlight those channels, so trade will be a part of it. Uncertainty impacts onto economic activity domestically because ultimately it is the slowdown in the domestic economy that really causes the stress for the financial entities, the banks, and in addition to that, the other channel is the financial market channel and the reliance that we have on global funding markets. So it will incorporate all of those and so that'll be very much the focus of that stress test.

Media

Just to follow though, my question was really about how specific you're going to be in the scenario. I mean if you're modelling for an earthquake, you might model for trans by fault sort of going for example, so everybody knows really what sort of risk we're talking about and that potentially helps people interpret then the information you provide. Obviously if you're dealing with geopolitical risks, I imagine that becomes a little bit more difficult and a bit more sensitive. So are you going to create a particular scenario in that modelling that you're talking about next year? Looking through the report and the discussion of risk of conflict Asia Pacific, it seemed fairly easy to read between the lines about the particular concerns banks might be having. Can you continue to let that reading between the lines happen or can you actually spell out in your view a particular scenario?

Christian Hawkesby

Chris?

Chris McDonald

I think what will be necessary is being clear about the transmission channels through to the financial system, the specifics of what the scenario underlying that is. We'll be considering that in the design process.

Christian Hawkesby

There are many different ways. We know that generically a geopolitical risk will drive through a number of different channels. You don't have to necessarily describe the exact specific features of who the conflicts between and the exact nature of the conflict, but it'll be more, it's a conflict that creates inflationary pressures, it pushes up inflation interest rates, creates those stresses and that makes it more versatile in a way because we can't narrow things down to one specific event, but they're going to have similar characteristics.

Media

Dan Brunskill from interest, if I could just go back to Lucy's question and ask, you obviously talk a lot about the risk of rising unemployment leading to more mortgage defaults, those kind of economic risks, steering clear of the monetary policy implications of that. Do you think that the economic conditions from a financial stability perspective have worsened over the next six months and is financial stability more at risk than it was six months ago?

Christian Hawkesby

The one thing that has changed is that the inflation pressures are less than our central scenario six months ago. That does take some pressure off the economy in terms of interest rates are able to fall, that provides some relief. What we call out in this document, which is more focused specifically on financial stability is that we're still feeling the after effects of the high interest rate environment that we've been in, so that's still working its way through. It does tend to be that the labour market does tend to lag the rest of the real economy. So even though we're seeing this good news on the inflation front, it can still feel tough in terms of the labour market and the experiences of households and businesses. Also in this document we need to make clear that as I said earlier, there's a central scenario and then there are the different risks around that Even though the central forecast for unemployment is to get up over five, five and a half percent, there are scenarios where it looks worse because other things happen in the meantime.

Media

So you wouldn't take a view on whether financial stability is at greater or less a risk than it was six months ago.

Christian Hawkesby

Broadly, broadly the same. Thank you. Our focus also is on the resilience, so there's the risk, there are the different challenges out there. We keep coming back to do we have a system that's resilient to withstand those and there our conclusion is the same.

Media

You talk about rural like farmers and the fact that the better export prices is helping them, but that there remains risks. You name China. Are there other risks out there that you see as being significant to our export economy and how big a risk do you see China and what particularly in China do you see as that risk?

Christian Hawkesby

I might draw in Chris again in terms of the agricultural sector and some of the differences there, but the main channel that we are talking about is the economic outlook in China, the way that they influence global demand, the impact that that has on both commodity prices and the volumes of goods that we sell internationally. That's been a longstanding concern in terms of the resilience of the Chinese economy. It works its way through different parts of the agricultural sector, different ways and I think that's an important point to emphasise. Chris.

Chris McDonald

Yes, the reason we've noted China is just because they're a major trading partner and really important for exporters on the kind of agri sector in general. Obviously prices have improved recently, they're in a better position. We do highlight there's a risk that there's fluctuations through time and prices could obviously come down the other, the point I'll make is that particularly the dairy sectors reduce the amount of debt that they've held, so they're in a much better position now to handle those fluctuations than they were perhaps five years ago. So in a stronger position, which I think is really important for our seamen of financial stability.

Media

Hello Brian Fallow filling in for Jenny. Ruth, can I ask you about the building societies? You note that collectively their costs are now exceeding their income and that doesn't sound like a particularly good state of affairs deposit taking institutions, what's gone wrong there over the past year and what's the bank doing about it?

Christian Hawkesby

Yeah, so thank you. That's a good question and what Brian's referring to as some of the tables and charts that we have in chapters three and four around the state of the New Zealand financial system. I think the thing I'd just call out in regards to the building society's sector and that number is that it's a small sector. There's sort of individual institutions in there that can kind of distort the overall numbers. There's a clear story coming through in terms of those institutions, some of the things that they've had to revise and revalue and the impairments that they've taken on certain lending that's understood. I think the more general point is both the building societies and the credit unions, what we call non-bank deposit takers have had a challenging environment in recent years with their scale. They've found it difficult to be profitable with that lack of scale and as a result we've seen a significant amount of consolidation through the non-bank deposit taker sector in recent years through transfers of engagement amalgamations effectively to operate with that scale required.

Media

Are you looking for more of that consolidation?

Christian Hawkesby

We can potentially see more of that occurring. Yes, it's a commercial decision for those entities. It's not for us.

Media

I mean it's all very well to say it's only a couple of million dollars. It's not systemically in court. It would be quite a lot of people. You seem fairly sanguine.

Christian Hawkesby

I didn't say anything about systemic importance. I wasn't seeking to belittle or not give due a regard to that sector it as one that we monitor closely, that we are connected very well to Jess. I wondered if you want to talk a bit about the relationships that we've been building through the non-bank deposit taker sector as part of under the Deposit taker act. We bring the banks who were under the Reserve Bank Act and the non-bank deposit takers under their separate act, under a joint umbrella. And do you want to talk a bit about the engagement we have with non-bank deposit takers?

Jess Rowe

Yeah, sure. It has been a really big focus for us probably over the last year and a half. For the first time, the non-bank deposit takers sector will be regulated directly by us and supervised by us and we've put a lot of time and effort into meeting with them frequently, understanding their business model, understanding the different kind of regulatory pressures they face and commercial pressures and right sizing our regulatory settings for that sector as well. In particular, we have a published proportionality framework that focuses our regulation on the smaller end of town, the MBDs, the mid-tier and the large tier. And it allows us to really sort of calibrate our regulation so it's fit for purpose for them. They've reported that they've found that engagement very helpful and has made meaningful changes in our policy direction

Christian Hawkesby

And that proportionality framework is one that when we talk to our colleagues internationally, they're looking very closely at what we are doing on that front to have such a coherent, clear framework that provides discipline for us to think for large, medium, small size deposit takers. Does each regulation need to be the same or can it be tailored for the requirements of those types of entities? Hi Dan.

Media

From interest again, I wanted to ask about bank profitability. It gets called out in this document as being something that's supporting financial resilience. The economy is coming under some pressure. Your viewers seemingly from the document that banks are resilient partly because they're profitable. Can you talk a little bit about how bank profitability has contributed to financial stability and is that a desirable thing and should we not be seeking to change that the way some policy makers are?

Christian Hawkesby

Yeah, so from a financial stability and a resilience point of view, we look at capital and profitability as the sort of first lines of defence for a bank in terms of the risks and the uncertain things that could happen out there and provide that buffer to work their way through. The only worst thing than a profitable bank is an unprofitable bank because it just does create so much more vulnerability and you've seen that internationally with Silicon Valley Bank and other things in the last 12 months or so. So that's the way we think about it. The profitability metrics for the banking system are relatively unchanged over the last six months. Broadly in line with those sort of longer term averages and previous reports, we've documented that the profitability of the New Zealand banking system seems high relative to the degree of risk that is taken. So we've shared that analysis in the past and that's fed into the Commerce Commissions report and their work.

We are very focused on competition here and I sort of outlined that in the opening many work streams that we are working on through there, including the proportionality framework, consulting on minimum capital levels to see if they can be lowered to promote new entrants consulting on the use of the word bank so that non-bank deposit takers can potentially use that word as well to again, create more competition. The deposit compensation scheme we think is going to be a really important part of the competitive landscape so that smaller deposit takers then depositors have confidence in them given their access to the deposit compensation scheme. And then we get into all of the things that we are doing with our central banking hats on in terms of the future of wholesale and retail payments.

Media

Less profitable could banks become before you would become worried about them, if you understand what I mean? People want banks to be less profitable, how much less profitable can they be before you start to worry about them in its report?

Christian Hawkesby

The way that we think about resilience is in terms of their capital levels, and Jess, do you want to speak a bit about the capital framework, but that's first and foremost capital and that's what our regulations are set around. Being profitable enables banks to keep their capital levels in good shape.

Jess Rowe

I mean, capital is really the cornerstone of our prudential regime and we're a small open economy and we can be blown around by international wins. So provided we have that solid level of capital and then we monitor, we have the capital buffer response framework, so as they start to eat into that, we have the supervisory response intensifies. And so that's really the way the system works as opposed to targeting a particular level of return on equity, return on investment.

Christian Hawkesby

Just while we're on competition, I think it's important not to get too fixated on profitability as a metric of competition. It is one metric. The other key metric from an outcomes point of view is the contestability of different services that banks provide. And within the commerce commission's report, open banking is a really important part of creating a more contestable ecosystem for banks to operate in. The role that we play as the centre of the wholesale payments regime and the role that we could potentially play in the future issuing a central bank digital currency has the potential to really influence the innovation efficiency competition of those elements of the banking sector. So I think that's a good way to think about do we have a competitive banking system? It's a think about the different products and services that banks provide and how contestable they are.

Media

And if I can just quickly tack on a question from my newsroom. The government's chosen to move the anti-money laundering regulation away from the Reserve Bank into DIA. How does the reserve bank feel about that? Do you support that move and what will happen to your, do you need to move staff to DIA to support that transition?

Christian Hawkesby

So we've worked closely as part of that. We didn't lead that review, but we contributed to that review with our analysis and our insights as one of the supervisors alongside the FMA who are currently supervisors of A ML now, the review result has been published. We are now in a process of implementing that. It's very early days. That's a transition that will occur over quite some time. Key thing for us as a prudential regulator is that a strong understanding of anti-money laundering and the insights that come from supervision of that regime are important for us as a prudential regulator as well. So even if we're not the supervisor of banks under that regime, it'll be something that we need to be really well connected to and understand has broader implicate the anti laundering regime has much broader implications for us as well when we think about financial inclusion more generally, particularly financial inclusion in the Pacific, for example, and how we can make sure that those banking channels remain open and we create those corridors.

Media

Jenée again from the Herald, is the Reserve Bank supportive of putting that a ML supervision and oversight under one roof or do you think that it's fairly specialised and you have the expertise and would be best to take care of the parts of it that you take care of?

Christian Hawkesby

Yeah, it's not our call to make. Ultimately we are not the decision maker, so we contribute to that analysis. There are pros and cons different ways in terms of we have very specialist knowledge of the banking sector, which makes us a particularly effective supervisor for amm L for banks. There are also benefits in having an amalgamated model where you have internationally there there's a wide range of different approaches. You have the one stop shop Australia style or in the UK you have 26 different AM ML supervisors. So there are pros and cons. Either way. The important thing for us is that we need to remain connected to those issues and we will.

Media

Okay, and just jumping to the deposit compensation scheme, should deposit takers be confident that the levies will be risk-based?

Christian Hawkesby

Consulted on that. We've provided advice to the minister just to update us on where we are.

Jess Rowe

Sure. It is obviously at this stage where it is a choice for government as to whether they set risk-based levies and how they do that. We have publicly consulted on our preferred approach, which is a risk-based levy and government will choose to announce their decisions in due course.

Media

Sure. I mean there's a bit of tension there that the government has to contend with in terms of the Reserve Bank's advice and the commerce commission's advice two different, I guess aims or two different institutions that are focused on different things. But how significant would it be if the levies were insufficiently risk-based in the reserve bank's view?

Christian Hawkesby

It's a decision for the minister. I think ultimately the important thing is the depositors. You're talking about whether different types of financial institutions preferred risk-based or not risk-based. The important thing is that depositors will be protected by this deposit compensation scheme no matter how the levies are collected. The important thing for depositors is that the levies will be collected. There will be a fund that's built up and that also has government liquidity backup as well.

Media

I mean, I guess the pricing of risk is kind of fundamental to the financial system. So there is a concern that if risk is not sufficiently priced, that's problematic and that has effects on financial stability. So what's your take on that? Is that worrying if risk is not properly priced by the scheme?

Christian Hawkesby

We've provided our advice and the advice was not to be fully risk priced. So it was a combination of the two. I think another important part of the jigsaw puzzle here as well is the prudential supervision that we provide. So these deposit takers who will be under the deposit compensation scheme. If you're under that, you're also under Prudential supervision from the Reserve Bank as well. So there'll be that scrutiny in addition to the risk pricing. Yep.

RBNZ staff

Any more? Beautiful. Okay, now we're going to turn to online. We've had a few questions come through. We've got the lovely Marnie Wood here today with us who's going to help ask those ones for you guys.

RBNZ staff

So the first question we have from the public is what are you most concerned about?

Christian Hawkesby

Should we take it one by one or shall I randomly? Why don't I draw the governor? Adrian, you've draw you into the conversation.

Adrian Orr

Thank you, Christian. And this is quite novel, having questions coming in from the public. That's great. Thank you. Money. In the very near term, we talking about an economy, we interest rates are now declining and some of that financial pressure is easing, but it's also, we know that the real economy lags behind that. And so businesses restructuring, reinvesting, employing, again, there is that lag that is going on and that is where we see the unemployment rate still increasing somewhat in our projections that we put out in our monetary policy statement. So getting through that, that tight period is always a concern. You don't want surprises or shocks to the downside during that period. We'd love to see a far more normal business cycle improve and come back. And the second part, probably more longer term, really is the existential threat and challenge that is coming through from climate change writ large throughout many of our documents for a long time now. The adaption, adaptation and mitigation challenges that are in front of society are significant and the financial sector needs to be leading that and needs to be resilient.

RBNZ staff

Thank you. Our second question from our online audience is how will you be addressing financial stability? What actual steps are you taking to improve it in New Zealand?

Christian Hawkesby

So it's this focus on resilience. So it's getting building confidence such that our financial institutions can weather good times and bad times, and they will be there for their customers and clients through those hard times as well. If we don't have a resilient financial system and it faces challenges and then retrenches stops, lending stops providing credit, that's the worst situation that we can be in because then the financial system is no longer an engine of growth. It becomes a thing that exacerbates cycles good and bad. So we're really looking for that. Everything that we can do to support a resilient system, but also a system that does just more than being resilient. It actually uses that resilience to serve customers, be competitive, be efficient, be inclusive, all of those good things that the financial system does.

RBNZ staff

Thank you. The third question that we have is, it's a bit of a long one, the FSR notes that the metrics for house price sustainability sit near the top of the indicator range. It seems to suggest less comfort with house prices than when LVR restrictions were eased in mid 2023, recognising that these indicators are subject to revision. Is that conclusion correct?

Christian Hawkesby

No. Chris, do you want to talk a little bit about our special topic on house prices and where we see things?

Chris McDonald

Yeah, sure. So as I mentioned, house prices currently Sydney, the top of the range of estimates that we look at. The thing that we highlighted in the housing work this time was just the significance of the house price cycle we've had over recent years, and in particular the resilience that households and borrowers have shown through that period. And there's a number of reasons why households have been so resilient. One of them is the fact that we've had the loan to value ratio restrictions in place for a number of years. It means that households have equity buffers so that when you do get these fluctuations and house prices, they're in a strong position to manage that and impacts on banks are managed looking forward. The debt to income tool that we've now put in place from July will help. And so we've got now this combination of tools, the LVR to the loan to value restrictions as well as the DTI, and they will build and contribute to resilience as we've seen over the recent years. Thank you.

RBNZ staff

Thank you. Yeah. The next question we have is, could something like the Silicon Valley Bank collapse happen here?

Christian Hawkesby

It's a great question and it's something that we're very conscious of, and it's those types of events internationally that really sharpen the mind about our own environment and our own regime. For those of you that aren't familiar, Silicon Valley Bank was a small US bank that had grown very rapidly to become a medium-sized US bank, and it collapsed a little over a year ago. That put us on high alert in terms of will that collapse directly affect our system? Do we have indirect exposures, but also more importantly, could that happen here and how is our regime different? Two things really stood out to us. One was that their problem was one of liquidity and our regime is much stronger than the regime that Silicon Valley Bank faced for its liquidity. But also a lesson there was around proportionality in the sense of, given that Silicon Valley Bank had been small, it was considered as though it didn't in the US didn't need to adhere to a number of things that the larger banks do. So it's a good lesson to us that when we do design a proportionality framework, it needs to be fit for purpose and it does need to do that job of ensuring that both your big banks medium and small do have that resilience there. And that's what we've been focused on.

RBNZ staff

So one last question I've been told. So does the Reserve Bank want to see greater access to capital via private capital markets? And what are the key risks you're concerned about here?

Christian Hawkesby

I might draw the governor in again, Adrian, for that broader perspective of funding outside of the banking system.

Adrian Orr

It would be fantastic to have a larger set of financial assets amongst households and businesses and more choice around how you can gain access to both equity and debt in this country. I would say across the OECD, our equity market is one of the smallest relative to GDP and alternatives outside of public banking. Well, public institution banking is also very, very small. So what it means is we have limited options around raising capital for business and often it ends up being mortgaging your house. So the deeper the asset classes are, the more optionality people have and generally the better risks, the better that risks can be managed. So it would be a good outcome. We're still in very early days of, for example, our KiwiSaver world where the vast bulk of those assets are still invested passively offshore. I had like to think that we're starting, we can start to see some more maturity coming in and developing markets internally within the country.

Christian Hawkesby

Great. Thank you. I think that wraps it up. Thank you for joining us this afternoon. Thank you for everyone who joined online. Thanks for your questions and those questions from the public. Look forward to seeing a number of you back here in a couple of weeks following the monetary policy statement. Thank you very much.

Audio: Kia ora, I’m Chris McDonald from the Financial Stability Group here at Te Pūtea Matua.

Here’s five things you should know about financial stability in New Zealand right now.

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One: The economy has got weaker this year. Households are spending less on non-essential goods and businesses are delaying new investment. Business conditions are challenging. While we expect to be near the bottom of the current downturn, further weakening is a possibility.

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Two: Unemployment is rising and this is creating financial difficulties for some households. The number of people falling behind on their loan payments remains low compared to previous recessions but may increase a little further.

Lower mortgage rates are starting to ease mortgage costs for many households. Around half of mortgage lending is set to refix onto lower rates in the next 6 months.

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Three: The housing market remains subdued and fewer homes are being built.

House prices have fallen across the country since 2021, particularly in Auckland and Wellington. Although the house price cycle has been rapid compared to overseas examples, there has been comparatively less stress on our financial system, demonstrating a high level of resilience.

Housing costs remain a stretch for many prospective buyers given the current level of interest rates. House prices are hovering around the top of our estimate of sustainable levels.

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Four: Despite more people falling behind on their loan repayments, banks remain resilient. The financial system is well positioned to support households and businesses as we get through this current economic downturn. This is important because it ensures New Zealanders can safely save, borrow, and feel confident that banks and insurers will continue to provide the services they rely on.

The Deposit Compensation Scheme is on track to be in place by mid-2025. This will protect New Zealanders' deposits up to $100,000 per an institution if their deposit taker fails.

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Five: Our recent stress test highlighted geopolitical tensions as a risk to financial stability. A key component of our financial stability work is making people aware of risks.

This year we asked banks to come up with a severe but plausible scenario that would cause them losses to the point they effectively fail. A common feature in the scenarios they submitted was a severe economic downturn primarily driven by an escalation in geopolitical tensions. The exercise highlights geopolitical risks are increasingly relevant to our financial system and their potential impacts cannot be underestimated.

You can find out more about financial stability in the latest report on our website.