The country's five biggest banks were tested on how they would deal with a global downturn triggered by a geopolitical shock. Photo: 123RF
Major banks are well-placed to withstand a severe economic downturn, according to the latest stress testing by the Reserve Bank.
The country's five biggest banks, ANZ, ASB, BNZ, Kiwibank and Westpac, were tested on how they would deal with a global downturn triggered by a geopolitical shock.
The first scenario involved a deep recession with output falling 6.5 percent, unemployment rising to 10.5 percent, and house prices falling 35 percent.
The RBNZ said major banks had built up capital levels over the past decade and were well-placed to deal with a downturn, but it would take years for them to restore capital ratios to current levels.
The report said mortgages contributed one-third of total credit losses in the first scenario, as borrowers who lost their jobs could not meet repayments.
RBNZ director of financial system assessment Kerry Watt said the test highlighted the importance of improving modelling capability.
The second test modelled how banks dealt with a severe run on deposits during a recession.
"To meet this outflow, banks relied heavily on borrowings from the Reserve Bank," the report said.
"This was supplemented by a smaller amount of sales of securities, borrowing from the market and borrowing from the Australian parent (in the case of Australian-owned banks)."
They were also tested on a failure of a transformation project, such as a major IT programme, with banks found to have sufficient capital to cover any losses.
Watt said this scenario highlighted the importance of effective governance, planning and risk monitoring.
He said recent developments around global trade highlighted the importance of testing banks' resilience to geopolitical risks.
"The exercise provides valuable insights for both participating institutions, the Reserve Bank and the wider financial system, helping to build our capability and preparedness to manage complex risks," Watt said.
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