Banks come through financial stress testing
The main retail trading banks received a pass mark after coming through tests to assess how they would cope with a major economic downturn.
The tests, carried out by the Reserve Bank last year, posed scenarios to the country's four largest banks, ASB, ANZ, Westpac and Bank of New Zealand, including what would happen to the banking system if a downturn in the Chinese economy caused a fall in New Zealand exports, rising unemployment, falling house prices and three-years of low payouts to dairy farmers.
The central bank found the major banks were resilient enough to be able to absorb significant losses while remaining solvent under the various scenarios tested.
Reserve Bank deputy governor Geoff Bascand said that by exploring severe but plausible hypothetical case studies, stress testing helped it better understand risks to the financial system and assess how to mitigate them.
"Since the Global Financial Crisis, stress tests have become a widely used tool by banking supervisors in most countries."
The results suggested banks as a group would be able to carry significant losses without breaching their minimum capital requirements.
Mr Bascand said he expected banks to be well capitalised, so they could continue to provide credit to the economy even under severe stress.
The Reserve Bank is currently reviewing how much banks have to hold in reserves and capital.
Currently, the central bank allows trading banks to decide their capital requirements, but with certain conditions attached.
Mr Bascand said the Bank would probably insist on a second set of risk calculations using an international standard to measure against what local banks come up with.
But David Tripe from Massey University's School of Economics and Finance questioned the robustness of stress-testing.
"We certainly don't get told the results of individual banks, how it affects each bank differently, and that presumably is a question of interest to us."
The Government does not guarantee bank deposits in this country, unlike other countries.
"If something goes wrong with the banks, we as depositors are supposed to work that out for ourselves and pull our money out," Professor Tripe said.
"The fact that [the Reserve Bank] can't provide a relative assessment of the riskiness of banks in terms of what the effects of these stress tests is on them is not a very encouraging outcome."