The financial system is strong, but vulnerabilities remain
While New Zealand has so far weathered the COVID-19 pandemic better than initially feared, vulnerabilities in the financial system remain, Reserve Bank Governor Adrian Orr said in posting the May financial stability report.
“Successful public health measures, coupled with substantial support for monetary and fiscal policies, have helped prevent many business failures and a further rise in unemployment. New Zealand’s major export prices also held up, with dairy prices at their highest level in several years.
“Yet despite doing better than expected, 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 rising house prices.
A high proportion of new loans had high debt-to-income and loan-to-value (LVR) ratios. This makes recent borrowers more vulnerable to rising mortgage rates and exposes households and the financial system to falling house prices, Deputy Governor Geoff Bascand said. The recent tightening of LVR requirements, especially for investor loans, will help mitigate some of these housing risks and support more sustainable house prices.
“We will observe how market conditions react to recent changes in government policy. If necessary, we are prepared to further tighten the loan terms for housing using LVR requirements or additional tools that we are evaluating, ”says Mr. Bascand.
Government support and strong capital and liquidity cushions have meant that the pandemic has had limited impact on the soundness of the financial system, but greater resilience is needed.
Most insurers have maintained or improved their capital over the past year. Strong restrictions on profitability and dividends have allowed banks to strengthen their capital levels, providing a buffer to absorb future losses, and overall, banks are in a good position to continue supporting their customers and l ‘economy. New capital rules will start to be implemented from October 1, 2021, with increases in minimum requirements from July 2022 to support resilience going forward.