Stress tests show strengthening bank resilience

The latest stress tests carried out by the Reserve Bank of New Zealand – Te Pūtea Matua show strengthening resilience in the banking sector and the benefits of continuing to build capital buffers.

Our annual bank stress testing programme helps us understand the implications of risks to financial stability by assessing the resilience of participating banks to hypothetical, severe but plausible stress scenarios.

We conducted two complementary stress tests for retail banks this year. Our regular Solvency Stress Test which tests the resilience of banks’ capital; and a Liquidity Stress Test which tested banks’ liquidity and funding resilience, Deputy Governor Geoff Bascand says.

“The results of the regular Solvency Stress Test showed that the New Zealand banking system has a stronger level of resilience than a year ago, as a result of higher capital levels, and is well placed to support the economy if conditions were to worsen,” Mr Bascand says.

“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 Liquidity Stress Test was our first banking industry test focused on liquidity since 2003. The test assessed the resilience of the 10 largest banks against unique liquidity shocks that result in a significant outflow of deposits and limits on access to market funding. The stress test was designed to test the extent of banks’ ability to meet customer withdrawals under very severe assumptions.

“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 Liquidity Stress Test provided useful insights into the resilience of banks to liquidity shocks and highlighted areas for improvement in banks’ internal stress testing capability. The findings will be used as an input into our upcoming Liquidity Policy Review, due to commence in 2022.

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