The unemployment level is key to how much bad debts banks carry in the economic shock of Covid-19, the Reserve Bank governor says.
Reserve Bank governor Adrian Orr. Photo: RNZ / Cole Eastham-Farrelly
In its latest financial stability report the Reserve Bank said the financial system was strong enough to withstand the impact of the Covid-19 virus but it expected a rise in bad debts and stressed household budgets.
Retail banks have brought in a range of measures such as mortgage deferrals, business loan extensions, and reduced charges, as well running the government backed business loans scheme.
However, there have been complaints that the main banks have been reluctant to lend in some instances and have been trying to impose tough conditions on loans.
Reserve Bank governor Adrian Orr said the financial system as a whole was well positioned to withstand a broad range of severe economic challenges.
"That doesn't mean there won't be significant bad debt onto banks' books.
"But the banks themselves will be able to weather and even prosper and support the economic recovery.
"That's because they started this situation with a high level of capital, because of regulatory requirements, and a lot of liquidity"
"It would be foolish to pretend we can predict; instead what we've been doing is say 'think about preparation' rather than prediction.
The Bank has looked at at what could happen in scenarios if a house price falls of anywhere between 10 percent and 50 percent.
"The answer is, banks can weather it subject to the unemployment level.
"It's really about having a job, being able to service that debt, keeping that debt alive is the key part."
If unemployment rose above 13 percent banks would have to use their full range of capital to manage the resulting bad debt, he said.
Interest rates are at historic lows but that doesn't affect someone who doesn't want to borrow or has no job.
"We will facilitate the ability but monetary policy has its limits, which why we've said we aren't the main game in town here.
"Fiscal policy, government expenditure, taxation, government investment the main game. It is about getting direct consumption, direct investment being done."
Orr said it will takes time for economy to adjust in what was a global economic shock.
"Everyone is working urgently ... but you can't just suddenly become everyone's boss and employ everyone overnight."
"I think we've done an incredible job in the health [issue]. For us to even be able to begin to talk or think about recovery is miraculous."
It was too early to tell if New Zealand was doing better or worse than other countries, he said.
"What's ahead of us is a much harder time for a while, but we need to be able to weather that and the financial system is in a great shape to be able to both prosper and assist."
