July 09, 2018

RBNZ published the results of the 2017 stress tests of major banks. The detailed results from the 2017 stress test exercise involve the four largest banks in New Zealand: ANZ Bank New Zealand, ASB Bank, Bank of New Zealand, and Westpac New Zealand. RBNZ also published its approach for using the stress tests to monitor the stability of the financial system.

Outcomes from the test suggest that the four banks would be able to maintain capital levels above their minimum requirements during these scenarios. Repricing actions to maintain relatively stable net interest income and low operating expenses mean that these banks would be able to offset large losses on their credit portfolios and from the misconduct event with their underlying earnings. There are, however, uncertainties around the magnitude of losses banks may face in a real downturn scenario and the extent to which banks would be able to restore their interest margins. As a result, the outcomes remain sensitive to the modeling assumptions used in the test. The stress tests modeled a severe macroeconomic downturn scenario and an operational risk event related to mortgage lending misconduct.

In feedback on their performance in the 2017 test, RBNZ encouraged further improvements in banks’ ability to assess how stress test results vary depending on modeling assumptions, and emphasized the importance of providing sufficient context around these sensitivities when discussing stress test outcomes with senior management and directors. Stress test results are also an input to the calibration of capital requirements, which are currently under review. RBNZ expects banks to be well-capitalized, so they can continue providing credit to the economy even under severe stress scenarios.

 

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Keywords: Asia Pacific, New Zealand, Banking, Stress Testing, Banking Supervision, 2017 Stress Test, RBNZ

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