The Reserve Bank of New Zealand’s (RBNZ) 2024 Financial Stability Report has spotlighted geopolitical tensions as a growing concern for the nation’s financial system.
The report included findings from the RBNZ’s 2024 Reverse Stress Test, which aimed to assess potential vulnerabilities and strengthen financial institutions’ resilience against economic shocks.
The test involved New Zealand’s banks simulating severe economic downturns to evaluate scenarios that could drive their capital levels below required thresholds. These simulations involved hypothetical recessions characterised by rising unemployment and declining property values.
Many banks identified geopolitical tensions as a primary factor that could exacerbate economic stress, compounded by additional risks such as cyberattacks and reduced insurance coverage in certain sectors.
To counter these adverse scenarios, banks explored potential capital-preserving actions, including limiting dividend payments, implementing cost-cutting measures, tightening lending standards, and restructuring loan terms. These preparatory measures allowed the banks to examine how they might respond under high-stress conditions.
Kerry Watt, director of financial stability assessment and strategy at the RBNZ, said the exercise has been valuable in assessing vulnerabilities within the financial system and enhancing risk management practices.
“The exercise has improved our understanding of the potential vulnerabilities of the financial system. It has also been a valuable exercise for testing and enhancing industry’s risk management capabilities,” he said.
RBNZ noted that global geopolitical tensions, such as international conflicts or policy shifts, can disrupt New Zealand’s financial landscape in various ways, impacting trade, consumer demand, and financial markets.
“Concern about geopolitical tension has been increasing recently. As a small open economy, dependent on international trade and investment, geopolitical risks are clearly relevant to our financial system. Their potential impacts cannot be underestimated,” Watt said.
In presenting the complete November 2024 Financial Stability Report, Deputy Governor Christian Hawkesby affirmed that New Zealand’s financial system remains well-prepared to handle ongoing economic headwinds.
The report noted that while inflation pressures are easing globally and interest rates are declining, New Zealand faces ongoing financial challenges, including rising unemployment and household debt.
Recent interest rate reductions have provided some relief to borrowers as advertised mortgage rates have begun to fall, offering households a measure of relief.
In addition, the report outlined progress on the Deposit Takers Act, which includes setting regulatory standards for deposit takers and preparing the Depositor Compensation Scheme for a mid-2025 launch. This scheme aims to reinforce the resilience of New Zealand’s financial system by providing additional security for depositors in the event of economic disruptions.
