Reserve Bank Email Service
Date 7 May 2008 Time 9.00am
NZ financial system withstands test, says Reserve Bank
New Zealand's financial system has so far withstood a severe test of global financial markets, but it would be prudent
to ensure there is adequate liquidity in case disruptions intensify, Reserve Bank Governor Alan Bollard said today, when
releasing the Bank's May 2008 Financial Stability Report.
Dr Bollard said the system has come through a period when many overseas financial institutions, including some of the
world's largest banks, have incurred substantial losses related to the US sub-prime mortgage market.
"The IMF has described recent events as the largest financial shock since the Great Depression. Adjustment could be
protracted, and further volatility in world equity markets, exchange rates and debt markets looks likely," he said. The
New Zealand economy looks set for a period of slower growth, already evident in the housing sector.
The New Zealand financial system has very little exposure to offshore credit risk or the structured debt products that
have damaged the balance sheets of many overseas banks. "Bank balance sheets remain solid, with appropriate capital
buffers," he commented.
However, Dr Bollard said New Zealand banks have been affected by the global tightening in liquidity and availability of
funds. "Banks in both New Zealand and Australia source a significant amount of their funding from global financial
markets. They are facing a higher cost of funds and reduced liquidity in some markets and this has flowed through to
higher borrowing costs for businesses and households.
"For its part, the Reserve Bank is undertaking some further changes to its liquidity management arrangements, designed
to help ensure adequate liquidity for New Zealand financial institutions in the event that global market disruptions
were to intensify. These measures include expanding the range of acceptable securities for domestic market operations to
include Residential Mortgage-Backed Securities."
The Reserve Bank is also reviewing its prudential liquidity policy for banks. "Part of the review is likely to be
focused on ensuring banks diversify their funding sources and lengthen the maturity structure of their debt."
Dr Bollard noted that banks appear to be tightening the availability of credit. "A more cautious approach to lending by
banks appears prudent. However, there is a risk that if credit conditions are tightened too much, the slow-down in the
economy will be exacerbated, putting additional pressure on households and businesses," he said.
Dr Bollard said the ongoing contraction in the finance company sector is being driven by domestic rather than
international events and is unlikely to have widespread effects on the financial system, with effects being relatively
contained.
ENDS