Reserve Bank issues Financial Stability Report

Release date
19 May 2006

The Reserve Bank today released its Financial Stability Report, a twice-yearly report that assesses the health of the New Zealand financial system.

Reserve Bank Governor Alan Bollard said in a statement: "New Zealand's financial system is well placed to weather the slowdown in the economy. With few exceptions, financial institutions are well capitalised and profitable. Foreign exchange markets have facilitated an orderly, albeit sharp, depreciation in the New Zealand dollar."

Dr Bollard said the FSR highlighted a wide variation in financial exposure among households and financial institutions.

"Household indebtedness has reached a record high, raising households' vulnerability to higher interest rates, unemployment, and a downturn in house prices," he said. "Vulnerabilities may be concentrated in those households that have recently invested in residential rental property."

Dr Bollard said New Zealand's banking sector was profitable, well capitalised and able to bear increases in impaired assets as economic conditions become more challenging.

"In this environment, credit risk management needs to be monitored closely, especially in light of the implementation of the new Basel II regime for bank capital requirements.

"A combination of rapid growth and comparatively young institutions, which have limited experience in managing a downturn, makes a significant part of the finance company sector particularly vulnerable to a more challenging economic environment. Isolated and individual failures among these institutions are unlikely to threaten overall financial stability, however."

Dr Bollard concluded that some of risks facing the financial system had crystallised since the Bank's last FSR.

"Other challenges have increased. Maintaining financial stability will require that risks continue to be adequately identified, priced and allocated to those best able to manage them," he said.

For further information contact:
Mike Hannah
Head of Communications
Ph 04 4713671, 021497418, mike.hannah@rbnz.govt.nz