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Our Take - RBNZ May 2018 Financial Stability Report

A firm focus on financial market culture
Review of the RBNZ’s Financial Stability Report (FSR), May 2018

Key Points

• New Zealand’s financial system is sound and efficient. And the risks to the system are familiar.

• We have a high level of household debt, and high level of dairy debt, and we rely of the kindness of strangers (foreign funding).

• The Australian Royal Commission has led to a look at the NZ banks for good measure.

• Macro-prudential policy will remain unchanged for a while yet. Debt-to-income metrics are high, and may yet be added to the RBNZ’s toolkit. Although resistance to adding the tool will be high.


The RBNZ today released their latest Financial Stability Report (FSR), noting that risks to NZ’s financial system have not changed since the last FSR six months ago. That is: housing indebtedness is high, dairy sector indebtedness is high, and NZ’s reliance on offshore funding remains a system wide vulnerability.

Unlike the November FSR, there was no fanfare loosening of loan-to-value-ratio (LVR) restrictions on new bank lending. The housing market is gradually recovering for last year’s slowdown, and the RBNZ does not want to increase financial sector risk at present.

As expected, the May FSR was overshadowed by the current Australian Royal Commission into the Misconduct in the Banking, Superannuation, and Financial Services Industry. The RBNZ devoted a special focus box on the issue. The revelations that have so far come out of the Commission boil down to issues around Australia’s banking culture. NZ’s Council of Financial Regulators (including the RBNZ and Financial Markets Authority (FMA)) has already reached out to NZ’s registered banks, asking boards to provide assurance that the same issues evident across the Tasman are not systemic at home.

Today’s FSR was used as a platform to highlight the RBNZ’s new snazzy Bank Financial Strength Dashboard. The dashboard provides stakeholders, including regulators, investors, and customers an easy way to compare different banks’ financial performance. The dashboard is seen as a way to strengthen banks’ self-discipline.

With risks unchanged compared to the last FSR, there are limited policy implications from today’s report. We expect the RBNZ begin gradually hiking the OCR from August (MPS) next year.

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