RBNZ's Orr sees a 'resilient' financial system but some elevated risks
By Jenny Ruth
May 29 (BusinessDesk) - The New Zealand financial system remains resilient to a broad range of economic risks, says Reserve Bank governor Adrian Orr.
“However, financial system risks remain elevated, and ongoing effort is necessary to bolster system soundness and efficiency,” Orr says in his latest Financial Stability Report.
“Domestically, debt levels are high in the household and dairy sectors, leaving borrowers and lenders exposed to unanticipated events. Similar challenges exist globally, given current high public and private debt levels, and stretched asset prices in many of New Zealand’s trading partners,” Orr says.
The central bank says the capacity for some foreign governments and central banks to respond to unanticipated negative events is also limited by their current high government debt and low nominal interest rates.
“It is imperative to improve New Zealand’s financial system resilience while conditions are conducive,” Orr says.
“Increasing financial institutions’ capital positions is central to ensuring that they can withstand severe shocks,” he says.
“We have proposed higher capital requirements for banks, and are currently reviewing public submissions on this proposal. There is also a need for some insurers and non-bank deposit takers to improve their capital buffers. We will be reviewing insurer solvency standards in the months ahead.”
Orr says financial services providers need to have a long-term customer outcome focus to both maintain confidence and promote sound resource allocation.
“We will ensure banks and insurers respond to the issues identified in our recent review of their conduct and culture,” he says.
Financial firms also need a longer-term focus to adapt to the changing competitive, regulatory, and natural environment.
“Insurers are changing how they manage their exposure to natural disaster events, which is altering affordability,” Orr says.
“Risks associated with climate change are also impacting on the accessibility of insurance, with potential flow-on effects on bank lending. These risks must be appropriately identified and priced, so as to best ensure a stable transition over coming years,” he says.
He notes that the Reserve Bank’s loan-to-value ratio (LVR) restrictions “have been successful in reducing some of the risk associated with high household indebtedness” and that the current LVR settings remain appropriate.