Financial system better placed

Financial system better placed to support economic growth

New Zealand’s financial system has benefited from recovery in the global economy, with banks now better positioned to meet future credit demand and support economic growth, Reserve Bank Governor Alan Bollard said today.

On the release of the Bank’s November 2010 Financial Stability Report (http://www.rbnz.govt.nz/finstab/fsreport/), Dr Bollard said that domestic rebalancing is proceeding but pressures on the New Zealand dollar are not helping.

“Households and businesses are keeping spending low as they reduce debt,” Dr Bollard said. “Combined with improved export commodity prices, this is reducing New Zealand’s current account deficit and external indebtedness, both of which are positive for financial stability. However, the New Zealand dollar remains relatively high, reflecting easy monetary conditions and weak economic activity in the major developed economies. If sustained, this will make the continued rebalancing of economic activity towards the tradables sector difficult to achieve.

“Emerging Asia remains the main engine of global growth and this has been positive for New Zealand. Financial markets have become more stable since the European sovereign debt crisis earlier in the year. But the widespread withdrawal of fiscal stimulus and debt reduction by consumers and businesses continue to pose risks to the global recovery. In the US new quantitative measures have been announced recently. These appear to be supporting risk asset markets, but they are also putting pressure on capital inflows and exchange rates in third country economies, which is problematic for international rebalancing.”

Deputy Governor Grant Spencer said that the New Zealand banks remain in good shape. They have substantially increased the stability of their funding base over the past year, consistent with the Reserve Bank’s new prudential liquidity policy introduced in April. This has reduced a major source of vulnerability highlighted during the financial crisis. Spencer added that the Reserve Bank is now removing its last remaining crisis liquidity facility.

“On the asset side, the level of banks’ non-performing loans now appears to be stabilising after rising steadily from mid-2007. We expect to start seeing an improvement as the economic recovery continues into 2011. Risks to this outcome would arise if the current softness in house prices were to become accentuated or if agricultural export prices were to drop off their current high levels.

In the non-bank sector, we have seen more failures of finance companies with high exposure to the property development sector, most notably South Canterbury Finance. “The remaining firms in this sector have less exposure to property and therefore provide a foundation for recovery and industry consolidation. The non-banks are also now coming into compliance with the requirements of the new Reserve Bank regulatory regime, most of which comes into force next month.”

Mr Spencer said an important new regulatory development has been the passage of the Insurance (Prudential Supervision) Act. The Reserve Bank is now responsible for prudentially regulating and supervising New Zealand insurers. This means all insurance providers, including life, health and general insurers, will have to meet prudential standards and be licensed by the Reserve Bank.”

He added that the Reserve Bank is generally supportive of the ‘Basel III’ initiative on new international standards for bank capital and liquidity requirements. “However, we will fully assess the potential impacts of these standards before making any changes in New Zealand.”

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