RBNZ plans bank stress testing to monitor sector’s health in event of downturn
By Paul McBeth
May 14 (BusinessDesk) - The Reserve Bank is developing a stress testing framework for the nation’s lenders to gauge
their health in the event of a downturn.
The measure became commonplace since the global financial crisis as bank regulators tested the individual strength of
lenders in the event of another crisis, and New Zealand’s Reserve Bank wants to set up its own regime which it expects
will “form a key component of the Reserve Bank’s prudential and financial stability framework,” it said in its
six-monthly financial stability report.
The central bank is developing the initiative to assess the impact of emerging risks to the financial system, develop
capability in identifying and responding to those risks, and provide prospective on the adequacy of lenders’ capital
buffers, it said.
“As well as providing an indication of the resilience of these institutions in an economic downturn, the exercise is
designed to strengthen the stress testing capability of these institutions,” the report said. “As capability grows, the
Reserve Bank expects stress testing to extend beyond credit portfolios, and to become entrenched as a regular part of
risk management process.”
Registered banks are already required to conduct internal tests, and subsidiaries of the major Australian-owned lenders
have participated in the Australian Prudential Regulatory Authority’s regime.
The central bank’s report found New Zealand’s banking system was sound, with impairments on non-performing assets only
just above the June 2006 low. The reduction in bad debt was largely in rural and commercial property sectors, while the
housing sector continued to have the lowest share of non-performing loans.
Bank profitability was back to pre-GFC levels, largely due to the fall in impairment charges, and future earnings would
“likely be influenced by how borrowers respond to the outlook for higher domestic interest rates.”
(BusinessDesk)