Reserve Bank of New Zealand underlines rising bank resilience from stress tests

Recent stress tests by the Reserve Bank of New Zealand (RBNZ) have shown increasing resilience in the banking sector and the benefit of continue to build capital buffers.

The bank conducted two complementary stress tests for retail banks in 2021. The first – its regular Solvency Stress Test – tests the resilience of banks’ capital. Meanwhile, the Liquidity Stress Test tests banks’ liquidity and funding resilience.

According to the RBNZ, the annual bank stress testing programme helps it ‘understand the implications of risks to financial stability by assessing the resilience of participating banks to hypothetical, severe but plausible stress scenarios’.

RBNZ deputy governor Geoff Bascand stated the results of the Solvency Stress Test showed that the New Zealand banking system has a stronger level of resilience than a year prior, due to higher capital levels. This, Bascand remarks, means the New Zealand banking system is well placed to support the economy if conditions were to worsen.

He added, “However, the results also indicated that a major stress event could make it difficult for banks to meet higher capital requirements in the lead up to full implementation of the new Capital Review standards in 2028. This reinforces the need for banks to continue to build capital in good times.”

The RBNZ’s Liquidity Stress Test was the bank’s first banking industry test focused on liquidity since 2003. The test examined the resilience of the 10 largest banks in New Zealand against unique liquidity shocks that result in a substantial outflow of deposits and limits on access to market funding. The RBNZ also highlighted that this stress test was designed to test the extent of banks’ ability to meet customer withdrawals under very severe assumptions.

Bascand said, “In the adverse scenario, only four banks’ liquid assets could meet their net cash outflows for a period greater than six months before mitigating actions were needed, while only one bank in the very severe scenario lasted that long. Large banks fared worse than the smaller banks. However, banks were able to identify actions that, if effective, would considerably improve the outcome.”

The RBNZ noted that the findings from the liquidity test will be used as an input into its upcoming Liquidity Policy Review, which is due to begin in 2022.

The RBNZ recently issued a consultation seeking feedback on challenges facing the country’s cash system and the options to maintain it.

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