Moody's Investors Service has assigned a stable outlook to the New Zealand banking system on the back of moderate improvement in the New Zealand economic environment and favorable trends in banks' businesses.The verdict came in Moody's annual "Banking System Outlook" document for the company, released yesterday.Moody's analyst Daniel Yu cited "a continued expansionary bias in the country's macro-economic policies" and "a moderate improvement in the operating environment". He also noted the continued rebuilding of earthquake-hit Christchurch, steady improvement in asset quality and strong levels of bank capitalisation.Yu said downside risks included the New Zealand financial system's high reliance on overseas funding. That, he said, would continue to expose the banks to external shocks such as a Euro zone collapse or a major Chinese slowdown.Moody's ranks New Zealand banks' average standalone financial strength at "a3" with a long-term issuer ratings of "Aa3".