The results of the most recent stress testing of New Zealand banks, performed in March, shows the benefits of increased capital requirements, says the Reserve Bank of New Zealand.
The results of the regular solvency stress testing of the country’s five biggest banks showed the banking system has a stronger level of resilience than a year ago, as a result of higher capital levels, said RBNZ deputy governor Geoff Bascand.
“However, the results also indicated that a major stress event could make it difficult for banks to meet higher capital requirements in the lead up to full implementation of the new Capital Review standards in 2028,” Bascand said.
The stress test consisted of one scenario: a hypothetical global COVID-19 resurgence resulting in widespread lockdowns and an economic downturn. In this scenario, the unemployment rate rises to 11.8 per cent, house prices fall by 39 per cent, and the OCR is cut to -0.50 per cent in response to the worsening economic conditions. A prolonged drought in the North Island is also included in the scenario, curtailing agricultural production. The scenario is assessed as a one-in-50 to one-in-75 year event.
The RBNZ also ran liquidity tests on the country’s ten biggest banks for the first time since 2003, and the results were less reassuring.
Only one of the banks would survive for more than six months in a worst case “very severe scenario” that saw depositors withdrawing their money following a disruption such as a prolonged cyber-attack, IT systems disruption, or fraud leading to reputational damage.
The major (Australian-owned) banks had a “shorter survival horizon” than the smaller banks.
"We believe there are benefits in repeating this exercise on a more regular basis to monitor longer periods of stress to complement our current prudential requirements – which focuses on banks holding sufficient liquid assets to survive stress over one week and one month. This exercise will be used as an input into our forthcoming Liquidity Policy Review,” the bank said.
As well as the release of the stress test results, yesterday also saw a farewell speech from Bascand, who is leaving the central bank in January.