Reserve Bank of New Zealand Financial Stability Report says banks remain resilient and signals December decision on capital settings

The Reserve Bank of New Zealand published its Financial Stability Report, warning that global and domestic uncertainty continues to present risks while concluding that banks remain well placed to manage current conditions, supported by lending standards and capital buffers. The report highlights vulnerabilities from fragmentation of global trade and finance, elevated equity valuations including in tech stocks, and growing government debt in many advanced economies, noting New Zealand’s exposure as a small open economy. Domestically, underperformance in sectors such as retail and hospitality is creating challenging conditions for households and businesses, with loan defaults picking up but still low compared to the Global Financial Crisis; lower interest rates and high commodity prices are supporting some sectors including agriculture. Strong lending standards, including loan-to-value limits, are cited as restricting high-risk lending, and recent stress testing indicated bank capital buffers could absorb a significant economic deterioration while continuing to provide credit. In insurance, property insurers have benefited from relatively few significant claims events and improved global reinsurance conditions, while health insurers are experiencing rapid claims cost growth, operating losses and rising customer premiums; regulated entities reported general alignment with the Reserve Bank’s cyber resilience guidance, though improvements are needed. The Reserve Bank is assessing feedback on proposals for key capital settings and taking input from international experts, with a decision intended for December. Supervisors are also monitoring impacts from the Depositor Compensation Scheme introduced in July, including deposit inflows at some non-bank deposit takers as customers spread funds to maximise coverage and returns.