Financial system sound, but key risks remain
The New Zealand financial system remains sound and continues to operate effectively, Reserve Bank Governor Graeme Wheeler said today when releasing the Bank's November Financial Stability Report.
"The banking system is well capitalised, liquidity buffers are above required minima, and non-performing loans continue to decline. Stress tests of all the major banks' portfolios undertaken over the past six months demonstrate that banks have the capacity to manage a range of adverse shocks.
"The financial system faces the same key risks that the financial system faced at the time of the May Financial Stability Report, although the balance of these risks has shifted in the past six months.
"The first of these relates to housing market imbalances. Pressures have eased since the introduction of the loan-to-value ratio (LVR) ‘speed limit' in October 2013 and subsequent increases in interest rates.
"We have always indicated that the LVR restrictions are a temporary measure. The reduction in house price inflation and housing credit growth are welcome developments, along with indications of increased residential building. However, there remains a risk of a resurgence in house price inflation, particularly in light of strong immigration flows. Consequently, we do not consider it appropriate to ease the LVR speed limit at this time. The Reserve Bank will continue to closely monitor the housing market," Mr Wheeler said.
Deputy Governor Grant Spencer said that, while housing risk has reduced, risks in the dairy sector have increased. "The forecast dairy pay out for the coming season has been reduced significantly, and could result in rising loan defaults should the lower pay out level persist.
"Lower global dairy prices are in large part due to reduced demand from China, highlighting New Zealand's vulnerability to a slowdown in the Chinese economy. Risks arise both from New Zealand's large volume of trade with China, and also from any financial market disruption that could arise from a Chinese economic slowdown.
"The banking system's reliance on offshore funding has reduced in recent years, but it remains susceptible to volatility in international funding markets."
Mr Spencer said that the Bank is currently undertaking a stocktake of the regulatory framework to ensure it meets its objectives clearly and consistently. Several initiatives are also underway to better measure and define bank capital adequacy. These include a benchmarking exercise for the large banks' internal capital models, and the development of a comprehensive stress testing framework. A review of the outsourcing policy for banks is also being conducted."
More information: Financial Stability Report
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