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Finance and Expenditure Committee 2023 — Financial Stability Report

We appeared before the Finance and Expenditure Committee for the November 2023 Financial Stability Report. Read the opening statement from Deputy Governor Christian Hawkesby.

Past Event
Monday, 12 February 2024 to Monday, 12 February 2024
1:30 pm - 2:00 pm

Financial Stability Report briefing

Watch the briefing on the November Financial Stability Report at 1:30pm with Governor Adrian Orr and Deputy Governor Christian Hawkesby, with support from other senior leaders.

How to watch the livestream

Watch the livestream on the NZ Parliament website

Read the opening statement

Kia ora koutou katoa
Ahi ahi marie koutou
E nga rangatira
Karanga mai, mihi mai, whakatau mai
Tēna koutou katoa

I’m Christian Hawkesby, Deputy Governor and General Manager of Financial Stability. The Governor and I are joined today by Director of Prudential Policy Kate le Quesne and Manager System Monitoring and Analysis Chris McDonald.

Also present with us are some of the very capable team that contributed to the November Financial Stability Report (FSR), which provides our latest assessment of the resilience of the financial system, and our strategy and priorities in the face of that assessment.

As we said when we released the FSR in November, our assessment is New Zealand’s financial system remains strong as it adjusts to a higher interest rate environment. New Zealand’s financial sector is strong and well placed to handle both the current adjustment to higher interest rates and other more severe economic scenarios.

We remain in a global high interest, high inflation environment:

  • while central banks globally have slowed the pace of tightening, the impact of previous interest rate increases is yet to be fully felt
  • a weakening in global demand, particularly in China, has contributed to lower key commodity prices for New Zealand, and
  • we are monitoring developments in the Middle East closely.

Domestically, New Zealand households continue to face higher debt servicing costs. Although most borrowers have been able to manage the increases by using their savings buffers and reducing their spending in other areas, we know that some people are struggling and there has been an increase in borrowers who are falling behind on mortgage payments.

Businesses are continuing to service their debt. Although the dairy and commercial property sectors are facing challenges, partly due to higher debt servicing costs.

I’ll briefly provide a few updates on developments since we published the FSR in November. In January we launched a consultation on activating debt to income (DTI) restrictions and loosening loan-to-value ratios (LVR) for residential lending. DTI restrictions set limits on the amount of debt borrowers can take on relative to their income, and we see them as a complementary tool to LVRs that will enable us to more efficiently target financial stability risks.

We’ve continued the mahi around implementing the new Deposit Takers Act, which will transform our approach to the regulation of banks and other deposit takers, while helping to ensure the safety and soundness of deposit takers. The Act introduces a new Depositor Compensation Scheme (DCS) so depositors can have confidence that their deposits, in the event of a deposit taker failure, are eligible for compensation up to $100,000 per depositor, per institution. A substantial work programme is underway to implement the new prudential framework for deposit takers. Parts of the current Banking (Prudential Supervision) Act 1989 relating to the regulation and supervision of registered banks and the Non-bank Deposit Takers Act 2013 will remain in force until the remaining parts of the DTA have been fully implemented.

We’ve also continued our collaboration and engagement with industry around improving Māori access to Capital. We are working collaboratively with retail banks to help them understand the flexibility of the regulator regime, and it’s been heartening to see some banks delivering innovative ways to support Māori to build homes on their whenua/land. 

We look forward to our continued engagement with Finance and Expenditure Committee and we welcome your questions.

Tēnā koutou,

It is my privilege to be here with you today representing the Reserve Bank of New Zealand’s Board. I’m pleased to be joined by Governor Adrian Orr, Assistant Governor for People and Culture Juliet Tainui-Hernandez, and Assistant Governor for Finance and Commercial Operations Greg Smith as well as other members of the Executive Leadership Team.

The past year represented a significant turning point in our history with the new Reserve Bank Act 2021 coming into force and the establishment of a governance board with significant decision-making responsibility.

A great deal of work has gone into bringing our new governance frameworks into action. This includes the creation of a comprehension delegations framework, and setting up a number of standing Committees of the Board to allow detailed engagement with key areas of the Bank’s operations. 

The Board has overseen the development of our Statement of Intent (2022-2026) and agreed to a new Foreign Reserves Management and Coordination Framework. This ensures that the Reserve Bank is well prepared for the extreme circumstances that may justify foreign exchange interventions to support our policy objectives. 

The Board reviews the performance of the MPC and its members. This review includes the quarterly Monetary Policy Statements and summary records of the MPC for each OCR decision.  The Board’s review concluded that the MPC and its members have adequately discharged their responsibilities in circumstances that have been challenging for setting monetary policy.

A great deal has been achieved over the past year, but much remains to be done as we continue our programme of transformation and modernisation. Key focus areas include implementation of the Deposit Takers Act, establishing a Depositor Compensation Scheme, and setting robust new prudential standards for deposit taking institutions. The new Deposit Takers Act, will transform our approach to the regulation of banks and other deposit takers, and introduce the Depositor Compensation Scheme. There are many years of work ahead to bring this legislation into full force. The Variation to our Five-Year Funding Agreement will facilitate this work and provided much needed investment in the RBNZ’s critical infrastructure and capacity to implement the legislation.

We are still in a period of deliberate investment in our people and systems as we build the capacity needed to support priorities such as the intensification of supervision as well as expanded requirements under the RBNZ Act 2021. Our goal is to be the most cost-effective, fit for purpose, central bank for New Zealand. 

I would like to take this opportunity to thank RBNZ staff, and all my Board colleagues for their advice, support and contributions throughout the year. The considerable achievements we have made in the past year could not have happened without their professionalism and dedication. I will now pass over to Governor Adrian Orr.