Financial Stability Report

Kia ora koutou katoa, nau mai haere mai, nau mai haere mai ki Te Pūtea Matua. Ko Christian Hawkesby toku ingoa. Tēnā koutou katoa.

So good afternoon. Thank you for joining us. I'm Christian Hawkesby. I'm the Deputy Governor here at the Reserve Bank and joining me today on stage we have Chris McDonald, our Manager of Financial System Analysis, Kate Le Quesne, Director of Prudential Policy, and of course the Governor Adrian Orr. Here at the Reserve Bank, we are charged with protecting and promoting the stability of New Zealand's financial system. Today we are here to talk about the May financial stability report, which focuses on our assessment of the resilience of the New Zealand financial system and our strategy and priorities in the face of that assessment. So to the report, New Zealand's financial system is well-placed to handle the higher interest rate environment and international financial disruptions.

Globally, inflation is persisting at levels well above policy targets, although many central banks have slowed the pace of tightening the full extent of the impact of previous tightening is still to be seen. Here in New Zealand households are facing increasing debt servicing costs as they're borrowing reprices at higher interest rates. To date, there have been limited signs of distress in banks' lending portfolios and this reflects the ongoing strength of the labour market and that borrowers have been able to adjust their spending and use previous savings and repayment buffers.

That said cash flow pressure among households and some businesses are growing. House prices have continued to decline and are now closer to sustainable levels. We've recently announced plans to ease our LVR speed limits from their historically tight settings and thus reflects our assessment that new lending activity now presents less risk to financial stability. The extreme weather events in the North Island earlier this year have caused significant disruption and physical damage to households, businesses, and property. New Zealand's financial system has been resilient to these events. Institutions continue to work with and support affected customers, however, it has highlighted the ongoing need and urgency to better understand and manage weather and climate-related risks.

Finally, the capital and liquidity positions of the New Zealand banks are strong. Profitability and asset quality remain high and our banks are not materially exposed to the same interest rate risks which have contributed to some recent bank failures in the United States. So in conclusion, New Zealand's financial institutions are well-positioned to continue to take a long-term perspective and support their customers through these challenging economic times. I'm very happy to take questions about the report. I should remind you that we are here again in a couple of weeks to talk about the Monetary Policy Statement so I can take questions on interest rates then and if you direct questions to me as leader moderator, I'll draw on my colleagues as appropriate. Thank you.

Media questions

Media: Does the strength of the jobs market data out today suggest that perhaps we might be heading for a sort of harder fall than you've factored into this financial stability report today?

Christian Hawkesby: I think that the labour market data that came out today, we'll talk about it in a couple of weeks as in regards to the monetary policy implications, but for financial stability, I think it underpins why we are seeing the resilience we are in the financial system, in the household sector. At the moment, the labour market remains strong, job security is high and people continue to have their ability to service their debts as even as interest rates do start to reprice at high levels.

Media: And I guess the bigger they are, the harder they fall. I suppose that strength of that data in terms of financial stability, does it pose an extra risk.

Christian Hawkesby: Well, I think we'll get on to the interest rate implications for that in a couple of weeks at the monetary policy statement.

Media: Sorry, just one further question. I mean you noted in the report that we're seeing the increased debt servicing burden fall very unevenly. I mean are we shaping up to see an extremely sort of unfair downturn here where a sort of very small proportion of recent home buyers suffer a big deterioration in their circumstances where other people are untouched?

Christian Hawkesby: So the key message from us today is that the financial system remains resilient. The household sector as a whole remains resilient. We are aware that there will be different pockets of lenders that borrowers that do have different experiences. We are very aware of the cohort of borrowers that came through in 2020, 2021 when house prices were high and interest rates and test interest rates were low. That's why we've been talking about that cohort, giving them time to plan, look ahead. We have the benefit of having a very strong financial system, which means those borrowers can engage early with their banks about the plans ahead and we've been very encouraged by the NZBA with the communications that they've had in that regard. Talk to your lender early. Yep.

Media: You recently loosened the LVR rules. Is the RBNZ trying to put a floor under the housing market and you're saying they're falling nearer to the sustainable levels? Is there a risk they fall below sustainable levels and what would that look like?

Christian Hawkesby: So just to be absolutely clear that the Reserve Bank does not target house prices. So what's really happening here is we are looking at the vulnerabilities that there are in the financial system and using our macro credential tools to build resilience in the financial system against those vulnerabilities. If you go back 18 months to November 2021, house prices were very elevated. We were very concerned about them being significantly above a sustainable level and the impact that they could have from a sharp correction and that's when we put our loaned value restrictions on at their tightest levels. What's happened since then, as you know house prices have fallen since then.

They've come back closer to a sustainable level as well as interest rates are rising and banks having higher test rates and all of those things mean that vulnerability has abated, which means it's time for us to start easing those restrictions. We haven't completely taken them off because there is a wide range of uncertainty around where sustainable house prices are. And as you mentioned, there is still the full possibility that house prices spend time below a sustainable level, particularly in an environment where interest rate levels are high.

Media: You say closer to sustainable levels. Do you really mean in the range at which we believe sustainable lands?

Christian Hawkesby: Well, Chris, do you want to talk a little bit about how we think about that in some of our measures?

Chris McDonald: Yeah. Okay. So with house prices having come off that peak that we saw in 2021, the price now sits within the range of the metrics that we're looking at. So we have a group of indicators. They each take different perspectives. They're medium-term indicators. So for example, we look at kind of trend or neutral levels of interest rates so they can be thought of as being over time where do you think house prices might head? So that kind of comes back to that point in the net. So I'm given the interest rates are as high as they are right now, they're above where we think that neutral level is. It suggests that there's still a real possibility that house prices continue to fall.

Media: Hi, Ainsley Thomson from Bloomberg, what kind of information are you getting from the banks about people who may not be in arrears in their mortgages but are having discussions with their banks about being in distress, maybe having to restructure their mortgage, things like that? Are you getting any kind of details on the numbers involved and what sort of distress people are in?

Christian Hawkesby: So I'll pass again to Chris in a moment, but we are highly engaged with the banks when we put this through our supervisory relationships through our teams that put together this assessment. So liaison with the banking sector is very important. We've quoted the non-performing loans numbers in the report. They remain very low, they've ticked up slightly, they remain very low. We know that those conversations are going on and are correspondingly at a reasonably low level at this stage as well. Do you want to give any more flavour to that, Chris?

Chris McDonald: Yeah, I guess what we've seen is some of the nearer-term indicators, so I'm thinking arrears when you're 30 days past due, they've ticked up and as Christian mentioned, from a very low level. I guess one thing I'd say is it's been reassuring to see the degree of resilience that we've seen to date and that demonstrates to us that households have in general been able to adapt, whether that's through adjusting their spending or whether it's through using the repayment buffers that the built up when interest rates were low. So there has been signs that households have been able to adapt to the environment that we're getting into.

Media: Okay. You announced a couple of weeks ago that you were introducing... Oh sorry, Lucy from Reuters that you were introducing debt-to-income ratios as a framework. You've talked today about the fact that you're looking at easing off LVRs. Is there a discussion, a case that you could maybe introduce a debt-to-income framework as well at the moment?

Christian Hawkesby: So I'll pass on in a moment to Kate to talk a little bit about more about debt to income ratios, but I guess the key distinction there was that our announcement around debt to income ratios was around our ability to use that as a tool in the future. So we were consulting on that basis for a long time. We've had the loan to value restrictions, we've wanted to be able to have other types of macroprudential tools in our toolkit and so that was really about preparing for that path. We've given the banks time to be operationally ready for that and then we'll make an assessment about what combination of tools we might need in the future. Kate, is there any more sort of detail on that?

Kate Le Quesne: Yeah. So-

Christian Hawkesby: Engagement.

Kate Le Quesne: Yep. So we've been working on the debt-to-income framework for some time. So over the last couple of years since the direction from the minister back around, I think it was 2020, so the debt to income framework was announced some time ago. The publication in April was around the framework itself. So those operational bounds we set around how we're going to set up any future restrictions, it wasn't about activating any restrictions at this point in time. So banks need around 12 months to get their systems operationally ready, inform their customers on the range of activities that goes on around new procedures. So by around April 2024, they would be in a position to activate a restriction should we choose to do so.

Media: Janae Tepsherani from The Herald, just on debt income restrictions, do you think you will implement them in April or are you just going to wait and see?

Christian Hawkesby: So it'll be subject to the environment that we're in at the time. Like any other macro-prudential tool, it's designed to build resilience against a vulnerability that we see that building, so we'll make that assessment at that time. The other thing that we'll have to do is make an assessment about how the two tools could be combined together and how we might calibrate those in a way that are not used individually but used in tandem. At the moment the trend is for us to be easing those macro credential tools. They are tools that you want to be putting on when those vulnerabilities are building and you want those tools to be binding through those periods. Now as we come through the cycle that we are seeing its environment where you want to be easing those restrictions to give you the ability to put them back on later.

Media: So when you say easing, you're suggesting that this easing that we're about to see is one step in a series of changes in terms of easing those restrictions?

Christian Hawkesby: We have made a marginal adjustment in those loan-to-value restrictions. We took them from the tightest setting that they've ever been. They have been at looser settings before so that the current setting is somewhere within the range and it's something that we can revisit, look to revisit every six months as we put together our reports.

Media: Okay. And just something else. Negative equity remains at relatively low levels. The report says can you sort of expand on this and provide any figures around what those portions might look like?

Christian Hawkesby: Chris, did you want to speak to this?

Chris McDonald: I think in terms of the best numbers for that, our discussions with banks earlier in March, they reported to us numbers of around one to 2%. So still quite a small share of overall mortgage lending.

Media: I don't know if you have numbers off the top of your head, but can you contextualise that in terms of what it's recently been and so on?

Chris McDonald: So obviously that would be increasing as house prices have fallen. We do have some internal models which are quite conservative in general and the estimate we've got from that from the current numbers is it's heading towards 4% but that is kind of the upper bound. So yeah, I'd use the one to 2% as a best estimate in March and that's probably increased from there and probably no more than 4%.

Christian Hawkesby: I guess a big picture message here is that we are pleased that we had those loan-to-value restrictions on through that period when house prices were very elevated because it builds up that resilience that's required such that only a small portion of a much smaller proportion of households are going to be exposed to that negative equity given those restrictions were placed when house prices were elevated

Media: Tom Pulistriker from Stuff again, I guess just following on from that, could you go into more detail about the support you expect banks to provide customers? I guess it's one thing to let customers extend their loans or switch to interest-only payments, but it's quite a different thing to actually forgive debt. Would you expect the banks to be doing the latter on any scale?

Christian Hawkesby: I think key message from us here today is that the financial system is resilient, the household sector as a whole is resilient. There's very limited signs of stress coming through at this stage and both us and the banking sector more broadly is encouraging these early conversations to be had. There are lots of different options that borrowers have when they go into periods where times are tougher. Extending the terms of lending going on interest-only periods of payback, so there's a whole lot of options there. Banks are providing a very strong signal that they're willing to have those conversations and have them early and having a strong, well-capitalised, very profitable banking system puts our banks in the position to have those types of conversations and provide that support.

Media: Okay, thanks, mate. That doesn't really answer the question. I mean should they be forgiving debt on any scale?

Christian Hawkesby: That's not a question for us.

Media: Ainsley from Bloomberg, again. On cybersecurity, the banks and financial institutions are spending a huge amount every year on trying to get this under control, but it just seems to be getting worse and worse. Is there any way to reign it in? Is it even possible, the scams, et cetera?

Christian Hawkesby: Yeah. So we haven't majored on cybersecurity in this particular financial stability report, but it is one that we've talked about a lot in the past. We've been doing a lot of work both with the financial sector and the government sector more generally about cyber risk and we've done a number of things around providing guidance to banks about managing their cyber risks, the types of things that they should be thinking about, the types of resilience they should be building in. We've been consulting, I might ask Kate to expand on this consulting on data collection in terms of building up a richer picture about those cyber risks and what lessons can be learned more generally from the sector from that as part of a general, broader push to build operational resilience across the financial system and cyber is a really key part of that. Do you want to talk about that data collection?

Kate Le Quesne: Yeah, so that's right. Cyber is one of the big operational risks that we sort of see and do need to monitor it closely and carefully. We've got an established work programme in place covering cyber as Christian described, so we have existing guidance with entities around how they might manage those risks. Christian alluded to a data collection consultation which is coming out in the near future as well as readiness a sort of playbook or protocol that we have in place with our Council of Financial Regulator peers and with our Trans-Tasman colleagues on how we might respond to incidents. It is one of the key priority areas across council of financial regulators. So it is something that we talk about often and consider our approach to.

Media:  And so the data collection, can you speak a bit more about that? Is that going to be publicly released?

Kate Le Quesne: We'll be consulting on data that we may collect from entities regarding their readiness for, I guess, yeah, preparedness for cyber-related incidents as well as any incidents that take place as well. So that would be the way we do collect any other type of prudential data for our prudential purposes.

Christian Hawkesby: And that'll be really helpful in an aggregate sense to be able to analyse share and all of those things as both us as regulator and the institutions themselves build up resilience.

Media: Hi, Dan Brownschool from interest. Pivoting back to Tom’s question you have just in this financial stability report told banks to use their profitability to support customers. Can you outline what specifically you mean by that? What support do you expect them to provide and what powers do you have to make sure they do or enforce that if you feel that they are not doing so? How will you regulate that?

Christian Hawkesby: Hey Adrian, do you want to expand on this? I've had one go at answering Tom's questions so you can have another go.

Adrian Orr: I'll do my best. I mean I think the question's best directed to the banks themselves. They are here for the long term. They're very proud about how they have been here for the long term. They're very profitable and so it's a matter of sticking with their customers for the long term. We don't have a policy on it, but Tom mentioned the types of things you can do and I'd only be saying to customers, talk with your financial institutions, stay close to them, let them know where you're at and what can we do about it. No, we don't have prudential regulations that insist banks do A, B, or C with their customers, but there's a higher degree of transparency and I'll be expecting consumers to be exercising that transparency.

Media: Lucy from Reuters, the recent run on US banks happened frighteningly fast and was caused kind of by online withdrawals. Have you guys looked at any kind of way of putting in regulation in place that might prevent a sort of similar fast run on a bank?

Christian Hawkesby: So the key thing here in the role that we play is to, and this is what completely underpins the issue, is to build confidence in the financial system and have a financial system that is resilient and sound and that is your best measure to reduce the chance of the being in a situation like what's happened in the US recently with those failures. We've looked at this very closely and how our banks compare or not to those US financial institutions. And the conclusion that we've come to is that our regulatory environment is much different than the US. Our banks are subject to much stricter capital requirements, liquidity requirements, and stress testing requirements, particularly relative to those small to mid-size US banks also our banks take far less interest rate risk than those US banks, those mid-sized US banks. And we have a particular special topic in the document outlining that.

Media:  And also it mentioned that there were particular pockets of vulnerabilities and mentioned the agricultural sector. Can you talk about where, whether it's right across the agricultural sector, whether we're seeing it in dairy, beef, and sheep if it's sort of an area specific, and how you might see that playing out?

Christian Hawkesby: Yeah. Largely dairy, but Chris do you want to expand a little bit on that touching on both dairy sector and commercial property?

Chris McDonald: Yeah, so in the business sectors we highlighted commercial property and agriculture and one of the key reasons for that is that those are two sectors which have on average higher levels of debt. So they're obviously therefore exposed to rising interest rates a lot more than perhaps some of the other business sectors. The second thing is for the agri sector you've got kind of a number of factors that are creating challenges for them. You've got increasing input costs has certainly been one of those. For dairy we've seen the expected payout for next season is much lower. So there's a number of the environment generally is tightening for them and that is quite likely to have some impacts. But in saying that, I think from when you think about the dairy sector, we have seen an improving trend over a number of years. We've seen them reduce the level of debt and strengthen their resilience so that when times like this happen they're in a better position for it.

Media: Bernard Hickey from TheKaka, I'm curious about the comment that house prices are back near sustainable levels and I noticed figure 1.5 shows New Zealand's median household disposable income to median house price is around nine. Is nine times income a sustainable house price level given for most of our history for the last 20 years we were [inaudible 00:24:41]?

Christian Hawkesby: So I guess the key point that we are making is that house prices have moved closer towards sustainable levels. If we go back to November 2021, we were confident that they were very, very long way away from sustainable levels and that's really what motivated putting those settings on in their tightest fashion. The direction is heading towards sustainable levels. There's a wide range of uncertainty around what a sustainable level of house prices is and that's why we look at a whole different range of measures in the document. We've just shown that one chart. Chris, do you want to talk a little bit again about maybe the different types of indicators that we look at to give a bit more context relative to the one-

Chris McDonald: Yeah, sure.

Christian Hawkesby: ...document there?

Chris McDonald: So we look at it from a few different perspectives. So one is for a household and you compare what it costs them to rent versus their mortgage payments. So that's one way we look at it. The other one that we consider is the cost of mortgage payments relative to incomes. So it's kind of slightly different take on some of the things. We also look at investors, there's a rental yield perspective and across all of those metrics, one of the really important components that feeds into it is where do you think the long run of trend level of interest rates is? And over 20 or 30 years we've seen a decline in that long-run level and that has been a major driver in terms of the rise in house prices relative to income over time. I would just say as well, the other point here is that there is a difference between sustainability and affordability. Our focus here very much is on what is sustainable.

Media: Sounds like it's slightly above affordable.

Chris McDonald: Was that a question?

Media: Okay. Why choose to relax the LVRs now? What were the things that prompted you to do it?

Christian Hawkesby: So we've talked a bit about the motivation being that these tools are there to be used when the vulnerabilities are largest and that's what really motivated having those on in their tightest settings back in November 2021. The other thing that we have to be really conscious of is that the trade-off between financial stability and efficiency that we are facing here and we are conscious that whenever we put our restrictions on the amount of lending that occurs in the economy, that is going to have an effect on efficiency and accessibility inclusion. So whenever we put a restriction on there will be credit-worthy borrowers who will otherwise not have access to credit that they should. So we need to be really conscious of that trade-off whenever we use these tools. Given that vulnerability has been abating, it comes into more equal balance where we now can have some regard to that efficiency of the financial system.

Media:  Janae again from The Herald with LVRs. Do you expect banks to use up all of their new limits that they'll be given?

Christian Hawkesby: No, we don't. As I mentioned earlier, the loan-to-value restrictions, they tend to win. You put them on when the credit growth is very strong, interest rates were lower, they acted as a constraint. They were calling the housing market calling off that vulnerability. Now our assessment is actually that's called off on its own accord in part because interest rates are higher because the test rates the bank and that's the main constraint that the borrowers are facing at the moment. It's the test rates that the banks themselves impose on that borrowing. So we don't think that high loan-to-value lending is going to increase significantly because of the actions that we've taken because of these other factors, but we just don't think that the restriction is required in the way it was previously.

Media: Okay. So if there's a 15% speed limit for owner occupiers, you don't think banks will go up to say 10% or 11%? They'll always keep a little buffer but you don't think they'll go up as much as they normally would whilst maintaining that buffer?

Christian Hawkesby: That's the feedback that we are getting from the banks.

Media: On both owner occupiers and investors?

Christian Hawkesby: That's true of owner occupies. Is there any... Investors the speed limit is it's 5%. So it's very much a margin of everything.

Media:  And just on bank profitability, do you expect profitability to ease a wee bit, particularly the net interest margin as monetary policy transmits the report notes, the lag, and some of the issues that causes? There's been a lot of attention around bank profits. Do you think that'll cool off?

Christian Hawkesby: So thank you for raising that topic and highlighting the special topic that we have in the document. Part of what that special topic covers is where are our bank profits now. What's a good way to think about them? What metrics should be applied to give a sense of where they are relative to history? We also talk about a number of temporary factors that have been supporting bank profits recently, such as low funding costs because of plaintiff strong deposit growth, the strength of the economy in terms of the quality of their lending.

And yes, some of those factors may evolve through time, particularly net interest margins as the yield curve. Yield curve evolves. So the special topic sets out where banks' profits are, what are some of the drivers, key message here from us is that having a profitable banking system is good in terms of financial stability. It builds that resilience. We're in a position much stronger than those US banks and the experience that they've been going through. But that profitability also needs to be used to support customers to build operational resilience and that's where we would really like the focus to be.

Media: Okay, and just, sorry, finally a broader question. There's the report notes, the difference between the big and the small banks in terms of profitability. Some small players might say, well the regulation is too heavy-handed, there's too much red tape and they just can't compete with the big banks that have big regulatory teams and so on to do submissions and et cetera. Do you think that these regulatory settings are kind of promoting competition in the banking sector? I know it's a broad question.

Christian Hawkesby: Yeah. Kate, do you want to? I think this is a really good lead-in to talk about the Deposit Takers Act and the work that we're doing around proportionality and a proportionality framework.

Kate Le Quesne: Yeah, so proportionate regulation is incredibly important. So adequately weighing up the benefits of any rules against the cost that comes with them to ensure efficiency, which enables an inclusive, diverse, and competitive financial system. So for us as we move through to the implementation for Deposit Takers Bill, where we're going to need to rewrite the rules for existing deposit takers plus new non-bank deposit takers as well. We're thinking carefully about how that looks. We're not envisaging a one size fits all approach. However, for existing regulated entities, we did get here by design in terms of a purposeful uplift in the level of regulation that we had in New Zealand to get us closer to a more globally standard regulatory environment in New Zealand.

So under the Deposit Takers Bill, what we are doing at the moment is developing what we call the proportionality framework, which is going to be setting up principles around how we think about applying proportionality into our regulatory rules. And so thinking about things like how do we group together different sizes of deposit-taking institutions, their sort of system, the importance to the system, their ability to deal with rules and complexity. So a range of different factors when we think about how we apply those rules, what we would say though is that there are going to be minimum bounds around how those rules look. There is a limit to proportionality because we are required under the belt to ensure soundness of individual institutions.

Adrian Orr: Could I just add to the excellent answer as well? The cost-to-income ratio differences between the major banks, which are really the large four and the rest significant and it's not a regulatory cost burden that explains that difference. So whilst the work we'll do is critical and important, it won't close that. We have very, very large banks which are internationally owned, which have significant economies of scale and all other financial institutions and New Zealand struggle to match that. That's the nature of a scaler business. So the whatever [inaudible 00:34:36] we do is not going to close that gap. There's going to be other competitive challenges, whether it'll be technology, open banking, digital currencies, those types of things, which will be the bigger impetus to change around that competition environment.

Media: I'm Rebecca Howard from Business Desk. I was just struck by the comment that affordability and sustainability are not the same. So I wondered if you could elaborate. I mean are you saying that sustainable if when house prices get to a sustainable level they may not be affordable and if that is so how is that sustainable? And the other question I just had was, there's no mention of this in the report, but are you concerned at all about the financial stability risk of a widening current account deficit?

Christian Hawkesby: Sorry, were you going to...

Adrian Orr: Yeah, on the first bit, we've been talking for a long time now about the difference between affordable and sustainable. Sustainable is something that you can explain with the underlying economics and settings of supply and demand and that may mean that something is sustainable but it's not necessarily affordable to all. Affordable is a very loaded concept. Affordable to who? A first home buyer? A low income? A high net worth? Well, what does it mean? So that's why we've always talked about sustainable. Can you explain it as build versus buy, rent versus own, owned to invest versus owned to live? Those are the measures of economic sustainability. And in RTRI, sustainable has been outweighing affordable for a long time now because of the underlying economic constructs, and globally with the declining global interest rates, that's also been increasing internationally. So house prices have been sustained in a sensible economic fashion well above what people may have considered historically affordable.

So this is the work that Chris and team and I would refer you to a lot of that collective work on our website because there are some significant insights and all of those measures that Bernard was looking for earlier. On the current account, just while I've got it. We are in a floating exchange rate world. Current account is how much we're spending internationally versus how much we're earning internationally. On that side, the exchange rate is the single biggest variable that will help equilibrate that likewise New Zealand's cost of borrowing on the way through. So whether we end up seeing higher than otherwise interest rate premiums, New Zealand versus the rest of the world, and until we see these current account pressures come back to sustainable, that's to be seen. It's not a targetable variable and I will remind people as well that our net financial position globally is very strong. So again, flows versus our actual stocks of capital is we are in a very strong position in New Zealand.

Christian Hawkesby: So Oliver maybe time for one or two?

Media: I wanted to ask about the flood situation and whether you think the insurers can handle the two big events we saw, whether they have enough capital and profitability, and whether those events and the potential for more frequent events mean that the general insurance sector is not as stable or robust as it was.

Christian Hawkesby: So the two weather events that we experienced earlier in the year on the North Island, they are the two largest weather events for the insurance industry in history. So two very significant events in short time. Our estimate that we've got on the document is the accumulatively across those somewhere between three to four billion insurance cost for the industry that is significantly below the likes of the Canterbury earthquakes, which were in the order of 27 billion. So significantly below, but right up there with the likes of the Kaikōura earthquake in 2016. We are very confident that the insurance industry here is well-resourced to absorb that in part through their access to reinsurance and the importance that reinsurance plays in New Zealand. They've all been very well positioned for that. So we are confident around that. We are conscious that insurance, reinsurance costs are likely to rise, reinsurance is going to get more difficult to access through time. We are expecting some of that cost to be passed through into higher insurance premiums.

Media: Do you have a sense of how much costs might increase?

Christian Hawkesby: We haven't got a magnitude in the document, but certainly, that is one of the themes and one of the pressures that the industry will face. We're also very conscious that there are some important discussions that need to be had at government level, at local government level around adaptation, adjustment to a world where there are more weather events, and that will give the reinsurance industry confidence that we've got it covered here and we have a plan for New Zealand.

Media: Do you have a view on whether the government should provide some sort of state-funded flood reinsurance scheme or intervene to buy retired or other land?

Christian Hawkesby: No, we don't have a view on that, but we know that they are working through those types of options. Looking to the future and the sustainability of access to insurance.

Media: Just on the climate area, again, you say that a quarter of the mortgages in Auckland are potentially exposed to climate risk. Have the banks adjusted their provisions and their capital enough for the risks of climate?

Christian Hawkesby: So that's not something that will be immediately reflected through into things like provisions, but it's the type of research, it's the type of stress testing that we are doing to enable banks to plan into the future in terms of what their exposures are and how they manage that. The more that we have the conversation early, the more time they have for their planning. Also, our role as the prudential regulator of the deposit-taking industry and the insurance industry enables us to make sure that those conversations are being had right across the financial system. So the connections and relationships are really well understood.

Media: And I also enjoyed special topic three, which is a page-turner. Figure 2.12 in particular, which shows New Zealand's banks have the highest profitability and that appears to have the lowest volatility and risk and therefore a much, much higher risk-adjusted return. Do the banks make profits that are too high relative to the risk and the sort of utility-style banking they do here?

Christian Hawkesby: So I think that special topic is rich with information. We were keen to have that chart in the document because it does show that risk is measured by the variants of revenues doesn't look to be the main explainer of why profits, particularly for the larger banks are where they are. I think Adrian's covered it in terms of their cost base and how that is a big factor in terms of their profitability, the lower cost base, what we've already talked about in encouraging the banks to use that profitability to support their customers. Also, use that profitability to build resilience into the financial system. We've talked a little, we've had questions about cyber resilience. We've had questions about the cyclone and the flood and the impact that had on the cash system and the resilience of the cash system. People's ability to access our bank branches, ATM machines, all of those things. That's where we would like some of the focus going forward to use those profits to build that resilience.

Media: You mentioned a while ago that the banks had not necessarily passed on higher-

Christian Hawkesby: This might be your last question.

Media: I saved them up to the end that you said that the term deposit rates the banks have maybe haven't reflected the rises in the official cash rate or rather interest rates. Have they changed that situation or maybe they haven't passed it on quick enough yet?

Christian Hawkesby: We're starting to see some of that come through since it's the last time we talked about interest rates at the last Monetary Policy Press Conference that was really about mortgage interest rates, roughly staying where they are, and deposit rates starting to rise. We have seen a little bit of that occurring in the document. We've also talked about plentiful deposit growth being one factor why banks have been able to keep deposit rates low because those deposits are plentiful. We are picking up that people are shifting more, looking for more competitive offerings. So we think that is coming through as well. As well as the fact that some of our own facilities have closed in terms of their access to funding from us and the need for banks to start planning to access that funding from elsewhere. And one of them will be through bidding more competitively for retail deposits. Do we have one last question?

Media: Sorry. An insurance policy holder protection regime, is that going to happen?

Christian Hawkesby: I believe that we are consulting on that at the moment, Kate, as part of the IPSA.

Kate Le Quesne: So that was something that we sort of I guess surfaced within one of our IPSA consultations. Ultimately that's going to be a question for the government.

Christian Hawkesby: All right. Thank you very much. Thank you for your enthusiastic questions and engagement in the report and look forward to seeing a number of you in a couple of weeks for the Monetary Policy Statement. Thanks, everyone.