27 November 2019
Financial system vulnerabilities remain elevated and more effort is required to ensure that the system remains resilient
over the longer-term, Reserve Bank Governor Adrian Orr says in releasing the November Financial Stability Report.
International risks to the financial system have increased. Global growth has slowed amid continued uncertainty about
the outlook for world trade. This has resulted in reductions in long-term interest rates to historic lows, including in
New Zealand. While necessary to maintain near-term inflation and employment objectives, prolonged low interest rates can
promote excess debt and investment risk-taking, and overheat asset prices, Mr Orr says.
Mr Orr noted that the Reserve Bank’s Loan-to-Value Ratio (LVR) restrictions have been successful in reducing the more
excessive household mortgage lending, thereby improving the resilience of banks to a significant deterioration in
economic conditions. But, there remains the risk that prolonged low interest rates could lead to a resurgence in
higher-risk lending. As such, we have decided to leave the LVR restrictions at current levels at this point in time.
Mr Orr says the Reserve Bank is committed to bolstering the long-term resilience of the financial system. “Strong bank
capital buffers are key to enabling banks to absorb losses and continue operating when faced with unexpected
developments. The Reserve Bank has proposed increasing these buffers further with final decisions on the Capital Review
proposals to be announced on 5 December.”
Deputy Governor Geoff Bascand says good governance and robust risk management processes within financial institutions
are important to maintain long term resilience. Our recent reviews of banks and life insurers, and the number of recent
breaches in key regulatory requirements, reinforces the need for financial institutions to improve their behaviour.
“We are engaging with industry to ensure that they strengthen their own assurance processes and controls. We have also
reviewed our own supervisory strategy and will be taking a more intensive approach, which will involve greater scrutiny
of institutions’ compliance,” Mr Bascand says.
“Some life insurers have low solvency buffers over minimum requirements. Recent falls in long-term interest rates are
putting further pressure on solvency ratios for some of these insurers. Affected insurers are preparing plans to
increase solvency ratios and are subject to enhanced supervisory engagement. This highlights the need for insurers to
maintain strong buffers, and insurer solvency requirements will be reviewed alongside an upcoming review of the
Insurance (Prudential Supervision) Act.”
More information:
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