Reserve Bank issues Financial Stability Report

Reserve Bank issues Financial Stability Report

The Reserve Bank today released its Financial Stability Report
(www.rbnz.govt.nz/finstab/fsreport), a twice-yearly report that assesses
the health of the New Zealand financial system.

Reserve Bank Governor Alan Bollard said in a statement: "New Zealand's
financial system is well placed to weather the slowdown in the economy.
With few exceptions, financial institutions are well capitalised and
profitable. Foreign exchange markets have facilitated an orderly, albeit
sharp, depreciation in the New Zealand dollar."

Dr Bollard said the FSR highlighted a wide variation in financial
exposure among households and financial institutions.

"Household indebtedness has reached a record high, raising households'
vulnerability to higher interest rates, unemployment, and a downturn in
house prices," he said. "Vulnerabilities may be concentrated in those
households that have recently invested in residential rental property."

Dr Bollard said New Zealand's banking sector was profitable, well
capitalised and able to bear increases in impaired assets as economic
conditions become more challenging.

"In this environment, credit risk management needs to be monitored
closely, especially in light of the implementation of the new Basel II
regime for bank capital requirements.

"A combination of rapid growth and comparatively young institutions,
which have limited experience in managing a downturn, makes a
significant part of the finance company sector particularly vulnerable
to a more challenging economic environment. Isolated and individual
failures among these institutions are unlikely to threaten overall
financial stability, however."

Dr Bollard concluded that some of risks facing the financial system had
crystallised since the Bank's last FSR.

"Other challenges have increased. Maintaining financial stability will
require that risks continue to be adequately identified, priced and
allocated to those best able to manage them," he said.

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