Financial system more resilient but still facing volatility
New Zealand's financial system is more resilient and positioned to support economic growth, but still faces a volatile and uncertain environment, Reserve Bank Governor Alan Bollard said today, when releasing the Bank's May 2011 Financial Stability Report.
"The global economic recovery is now broader, and strong growth in Asia is supporting commodity producers like New Zealand and Australia. However, global wholesale funding markets remain fragile, given stretched fiscal positions and banking sector problems in some European countries," Dr Bollard said.
"Efforts by households and businesses to cut or contain debt are reducing New Zealand's overall external imbalance, but are also weakening domestic demand. Government too is looking to consolidate its financial position, which should help to improve the country's overall external position."
Dr Bollard noted the February earthquake had caused financial stress for households and businesses and created a challenge for the insurance sector in dealing with claim flows. But the banks' readiness to support recovery in Christchurch was encouraging.
"Rebuilding will add momentum to the economy and is likely to require access to credit, despite much of the damage being substantially insured."
Deputy Governor Grant Spencer said the New Zealand banking system has continued to strengthen.
"Bank profits have recovered over the past six months and bad debt charges declined. Bank funding has moved to a more stable footing and capital ratios are relatively high. Non-performing loans are elevated but remain manageable."
Mr Spencer said the Reserve Bank is currently evaluating the new Basel III global regulatory standards for bank capital adequacy and liquidity and expects to consult with banks on this later in the year.
Other matters under way include the restoration of more appropriate risk weights on rural lending from June, and an increase in the required minimum Core Funding Ratio for banks from 65 percent to 70 percent from 1 July. "These moves have been well signaled and largely anticipated by the banks."
The Reserve Bank is also consulting banks about pre-positioning their internal systems to enable Open Bank Resolution. This is a process that would allow a failing bank to be kept open by rapidly allocating losses across shareholders, depositors and other creditors.
"Having this option in the tool kit should reduce the pressure on Government to adopt taxpayer funded solutions when dealing with a distressed bank," he said.
The Reserve Bank recently assumed the role of insurance sector regulator. Following the recent earthquakes, the Government has had to support AMI to ensure an orderly claims process in Christchurch.
"The Bank has accelerated its work programme in light of the earthquakes and is monitoring this sector closely. While there remains considerable uncertainty over the extent of total final claims, we believe the overall industry is sound," Mr Spencer said.
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