Reserve Bank Of New Zealand Explores New Techniques To Enhance Financial Stability Monitoring

The Reserve Bank of New Zealand, Te Pūtea Matua has published two new Analytical Notes that investigate utilising new models and data sources to complement existing approaches to monitoring financial stability.

The first Analytical Note - Getting sentimental: Using news sentiment to measure financial stress in New Zealand authored by Analyst Trent Lockyer, investigates using measures of news sentiment as early-warning indicators of financial stress in New Zealand. This Note introduces new indicators which measure economic news sentiment in New Zealand.

Preliminary findings suggest these indicators can complement existing monitoring tools, offering timely insights into potential risks to the financial system.

The second Analytical Note - Beyond the crystal ball: forecasting non-performing loans authored by Senior Analyst Tyler Smith, investigates the relationship between non-performing loans and economic conditions to provide insights into the future health of New Zealand’s financial system.

Non-performing loans are where the borrower has defaulted on a loan and the lender, such as a bank, could potentially incur some losses. An increase in non-performing loans can impact profitability, solvency and funding accessibility for lenders. This in turn may affect lenders' ability to continue supplying credit to households and businesses, which would have negative impacts on the broader economy. This Note finds that macroeconomic conditions can be useful in forecasting the future path of non-performing loans.

"While modelling of non-performing loans and news sentiment have been extensively studied internationally, little research has been done in a New Zealand context," Director of Financial Stability Assessment & Strategy, Kerry Watt says. "These Analytical Notes represent a step forward in our efforts to enhance the robustness of our financial stability assessments."

Both Notes reflect the Reserve Bank’s commitment to leveraging advanced analytics and data sources to strengthen its oversight of financial stability. Providing insights into risks helps to more effectively anticipate and mitigate them, thereby promoting a resilient financial system that supports sustainable economic growth.

More information

• Getting sentimental: Using news sentiment to measure financial stress in New Zealand 
• Beyond the crystal ball: forecasting non-performing loans

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