How the banking sector chooses to respond to the significant impact caused by the COVID-19 pandemic will have a major
influence on how the financial system evolves over the next decade.
The pandemic has posed significant challenges to both our economy and the financial system as a whole. We expect it will
take some time before we see a full recovery, Reserve Bank - Te Pūtea Matua Deputy Governor and General Manager of
Financial Stability Geoff Bascand said in a speech delivered today.
“New Zealand’s financial sector has proved resilient to the dual health and economic shocks and indeed, supported the
business and household sectors through strong business continuity arrangements, the accommodation of many customers
through the restructuring of borrowing terms, and only a relatively modest tightening of lending standards.
“A financial crisis and ‘credit crunch’ on top of an economic crisis would be hugely disruptive for New Zealanders’
wellbeing. The ability of financial institutions to absorb shocks, accept risk and continue lending in the face of
shocks is foundational to our regulatory framework.”
Banks entered the crisis having built up strong capital and liquidity buffers boosted by a number of years of favourable
economic performance, and anticipation of the implementation of the Reserve Bank’s Capital Review. The Reserve Bank
delayed implementing the review’s outcomes during the initial COVID-19 response, to allow banks to focus on supporting
their customers, and the Reserve Bank remains committed to fully implementing the review’s outcomes no earlier than July
2021.
“Banks’ initial responses to the COVID-induced lockdown was strong. Banks stepped up and supported their customers with
mortgage deferrals, liquidity facilities, and covenant relief. But a key determinant of the success of New Zealand’s
economic recovery to come will be the willingness of banks to lend to productive, job-rich sectors of the economy. The
banking sector could choose to hunker down and seek to ride out the storm until the good times roll around again. Or, it
could continue to step up and play a crucial part in supporting New Zealand’s economic recovery,” Mr Bascand says.
“Now is the time for banks to drawdown prudently on their buffers to support their customers. Shareholders will have to
be patient for longer-term payoffs, but this forward-thinking, long-term approach will stand bank customers, banks,
shareholders, the financial system and Aotearoa in the best position.”
Beyond the immediate crisis, the banking sector must confront long-term low interest rates, and an eye to the future
will also pay heed to emerging risks and structural disruption from accelerating digitisation and new forms of
competition. Increasing internal investment, clarity of business models and customer focus, and strong risk management
will be required. Managing customer, investor and regulator expectations in the face of persistent structural changes
and an evolving risk environment will require strong organisational leadership and governance.
The COVID-19 crisis has reinforced the Reserve Bank’s focus on both resilience and risk management - which is evolving
to be more attuned to the changing structures and dynamics in the financial sector, including the implications of cyber
risks, FinTech, climate risks and the economy’s increasing reliance on payments systems stability. These longer-term
structural changes in the sector highlight the importance of a regulatory system and perimeter that can adapt to
non-traditional financial entities, which is a key consideration of Phase 2 of the Review of the Reserve Bank Act.More information:Speech by Deputy Governor Geoff Bascand: Banking the economy in post-COVID AotearoaReserve Bank Statement of Intent 2020-2023Phase 2 Review of the Reserve Bank Act – Have your say