While New Zealand has so far come through the COVID-19 pandemic better than initially feared, vulnerabilities in the
financial system remain, Reserve Bank Governor Adrian Orr says in releasing the May Financial Stability Report.
“Successful public health measures along with substantial monetary and fiscal policy support, helped to prevent many
business failures and a larger rise in unemployment. Key New Zealand export prices have also been resilient, with dairy
prices at their highest level in several years.
“Yet, despite doing better than feared, border restrictions, supply chain disruptions, and social distancing have
reduced activity in affected sectors, and some businesses remain vulnerable.”
We are also seeing the impact of low global interest rates resulting in increased risk taking and higher asset prices.
This is an international phenomenon, with the New Zealand impact most visible in higher house prices.
A high proportion of new lending has had high debt-to-income and loan-to-value ratios (LVR). This makes recent borrowers
more vulnerable to a rise in mortgage rates, and exposes households and the financial system to a decline in house
prices, Deputy Governor Geoff Bascand says. The recent tightening in LVR requirements, particularly for investor
lending, will help to mitigate some of these housing risks and support more sustainable house prices.
“We will be watching how market conditions respond to the Government’s recent policy changes. If required, we are
prepared to further tighten lending conditions for housing using LVR requirements or additional tools that we are
assessing,” Mr Bascand says.
Government support and strong capital and liquidity buffers have meant that the pandemic has had a limited impact on
financial system soundness, but further resilience is needed.
Most insurers have maintained or improved their capital positions over the past year. Solid profitability and dividend
restrictions have allowed banks to build their capital levels, providing a buffer to absorb any future losses, and
overall banks are in a strong position to keep supporting their customers and the economy. New capital rules will start
being implemented from 1 October 2021, with increases in minimum requirements starting in July 2022 to support
resilience in the future.More information:Download the May 2021 Financial Stability Report (1.9MB)Updated Capital Review Implementation Timeline (PDF 260KB)