Reserve Bank releases Financial Stability Report

Release date
15 November 2006

The Reserve Bank today released its Financial Stability Report, a twice-yearly report that assesses the health of the New Zealand financial system. The report covers developments in financial institutions, foreign exchange and debt markets, and payments systems. It also comments on recent financial policy developments.

The Reserve Bank Governor, Dr Alan Bollard, commented: "Banks continue to appear well capitalised and continue to return strong profits. However, banks are competing in an aggressive manner, accepting lower margins and higher risk loans in their efforts to retain and grow market share in mortgage lending."

"With the household sector already saddled with considerable mortgage debt, any increased strain to service these debts, such as reduced incomes or higher interest rates, and unexpected decline in house prices, would impact negatively on the quality of banks' balance sheets.

"The Reserve Bank will be watching such developments closely, in particular as it implements new capital standards for banks that aim to ensure they have a sufficient buffer against unexpected losses," he said.

Dr Bollard said that "the Bank continues to expect the New Zealand economy will rebalance through a gradual slowdown in domestic spending and a reduction in the current account deficit."

"However, New Zealanders continue to be heavy users of foreign savings to largely finance housing. This leaves us vulnerable to any change in global perceptions of New Zealand's credit worthiness. A turn for the worse in such perceptions would push New Zealand's longer-term interest rates up and possibly force a more rapid rebalancing in the current account deficit than is comfortable." he said.

"The New Zealand foreign exchange market is also experiencing a high level of foreign investor attention as global investors make use of New Zealand's interest rate differentials. Given the inherently cyclical nature of such flows, a shift in expected interest rates globally could lead to an outflow of speculator funds and volatility in the New Zealand dollar exchange rate."

Dr Bollard concluded by noting that legislation has recently been passed in New Zealand, and is progressing in Australia, that formalises each other having regard to trans-Tasman financial stability when implementing policy.

"The legislative changes represent a pioneering step in cross-border banking supervision. They draw a realistic balance between the desirability of trans-Tasman cooperation and the necessary independence of each prudential regulator within their national boundaries."

For further information contact
Anthea Black
Communications Adviser
Ph 04 471 3767, 021 222 5225, anthea.black@rbnz.govt.nz