Outcomes from the 2017 stress test of major banks
The Reserve Bank uses stress tests to assess the soundness of the financial system. This article summarises results from a recent exercise involving the four largest New Zealand banks. The test modelled a severe macroeconomic downturn scenario and an operational risk event related to mortgage lending misconduct.
Consistent with previous tests, results suggest that strong underlying profitability from repricing actions to maintain their net interest margins would allow these banks as a group to absorb significant losses through the stress scenario without breaching their minimum capital requirements. While the test demonstrates these banks’ resilience, there remains uncertainty as to how such scenarios would unfold in reality.