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Banks able to cope with severe shocks, latest stress test by central bank finds

Banks would be able to cope with severe shocks – such as a fall in house prices like never seen before – under the latest test carried out by the central bank.

New Zealand money. Source: istock.com

That’s the findings of the Reserve Bank’s latest stress test on our retail banks.

The Bank launched the test in March, following the Covid-19 outbreak. It poses hypothetical scenarios to see whether the banks would have the capital to be able to continue lending to customers and keep the economy moving.

Banks are required to keep buffers for when the bad times hit.

“The onset of the Covid-19 pandemic provides a stark reminder to us all of the importance of being prepared for the unexpected, especially when you are a systemically important bank at the core of New Zealand’s financial system. The more capital a bank holds, the better it can weather economic storms and meet customer needs during tough times like now.” Deputy Governor Geoff Bascand says.

Experts, home buyers not convinced New Zealand house prices will fall

Two severe scenarios were placed on the countries largest banks.

The first looked at a one in 50 to one in 75 year scenario, with unemployment rising to 13 per cent and annual GDP falling by 12 per cent, with a 37 per cent fall in house prices.

The first scenario found banks would be able to continue lending.

But a second, more severe scenario, which was a one in 200 year hypothetical, assumed unemployment would rise to 18 per cent and see an 18 per cent decline in level GDP and a whopping 50 per cent decline in house prices was not so rosy.

It found the shortfall in total capital reached $7 billion and banks would have to take extreme action to meet the minimum requirements posed on them by the Reserve Bank.

“Under this scenario, banks come under considerable strain, and would need to access additional capital to remain above their regulatory minimums”, Mr Bascand says.

"The more bank capital there is, the less the banks and the New Zealand economy are exposed to the risks of decision making under uncertainty.”

The results of individual banks has not been made public.

The Reserve Bank put on hold plans to force banks to hold more capital when the Covid-19 outbreak hit.