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RBNZ: Financial system will benefit supporting economic recovery

Tēnā koutou katoa, welcome all.

The financial system is in a solid position to both weather the significant economic impact caused by the COVID-19 pandemic and support New Zealand’s recovery, Reserve Bank Governor Adrian Orr says in releasing the May Financial Stability Report.

“At the outset of the pandemic the banking system had significant capital and liquidity buffers, built up due to both regulatory requirements and several years of favourable banking conditions. These buffers can now be used to support their customers’ long-term economic future. Our economic stress test analysis suggest banks can continue to lend and prosper through a broad range of adverse scenarios,” Mr Orr says.

“Banks have a critical role in supporting customers who are facing short-term income declines. Maintaining the flow of credit to financially sound customers also contributes to the long-term profitability of the banking sector, by avoiding unnecessary defaults and disorderly corrections in asset markets,” Mr Orr says.

Deputy Governor Geoff Bascand says the Reserve Bank and the Government have been working with industry on a number of initiatives to support the flow of lending and functioning of the financial system.

“Our actions have included making bank funding plentiful and cheap, facilitating the deferral of loan payments, and ensuring cash was readily accessible nationwide,” Mr Bascand says.

Outside of the banking system, some parts of the financial system entered this downturn in a vulnerable position. Some non-bank deposit takers (NBDTs) have low profitability and are operating with low buffers. There has been consolidation in this sector in recent years and this is expected to continue. Resilience could also be boosted by seeking operational efficiencies, asset sales, and additional capital.

Some life insurers have also been operating with low solvency buffers, while other insurers have experienced investment losses and/or rising credit insurance claims. We are continuing to work with insurers to see them build better resilience and maintain a strong focus on long-term customer outcomes.

Reserve Bank and Government policy initiatives to support the financial system and lending:

  • Loan Deferral Scheme: Banks have offered household and small business customers a deferral of loan payments for a period of up to six months. This has been facilitated by appropriate capital treatment of these loans by the Reserve Bank.
  • Business Financing Guarantee Scheme: This provides small and medium firms with partially government-guaranteed loans at a concessionary interest rate to manage short-term income disruption.
  • Bank liquidity and funding support: The Reserve Bank has introduced concessional term funding facilities for banks and has eased bank core funding requirements to alleviate liquidity and funding pressure on banks.
  • Regulatory relief: The Reserve Bank has delayed implementation of planned increases to bank capital ratio requirements by at least 12 months, temporarily removed loan-to-value ratio restrictions, and delayed a number of other regulatory initiatives.
  • Cash access: The Reserve Bank worked with banks and their service providers to ensure the functioning of the cash system through the lockdown period in response to a significant increase in demand for cash from banks, retailers and the public.

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