Featured Product

    RBNZ Releases Results of COVID-19 Stress Test on Largest Banks

    September 17, 2020

    RBNZ published the results of a stress test that was launched in March 2020 to determine the resilience of banks and the financial system to the posed by the COVID-19 pandemic. The results of the stress test suggest that banks could draw on their existing capital buffers and continue to lend to support economy during the downturn in the hypothetical pessimistic baseline scenario. However, in a more severe scenario, capital of banks fell below the regulatory minima, thus requiring significant mitigating actions, such as capital injections, for banks to continue lending.

    The COVID-19 stress test consisted of two parts. In the first part, RBNZ conducted a desktop stress test involving nine largest banks in New Zealand, which hold 92% of total bank loans. These banks are ANZ Bank New Zealand, Bank of New Zealand, ASB Bank, Westpac New Zealand, Kiwibank, TSB Bank, Southland Building Society, Heartland Bank, and The Co-operative Bank. Using bank data, RBNZ modeled the effect on banks’ capital under two scenarios involving a rapid decline in economic activity, increase in unemployment, and fall in property prices. In the second part, RBNZ coordinated a process in which the five largest banks used their own models to estimate the effect on their capital under the same two scenarios. The scenarios—the pessimistic baseline scenario and the very severe scenario—were set at different levels of severity taking elements of the scenarios developed by Treasury in April, in combination with different degrees of global economic stress. These scenarios are hypothetical and are significantly more severe than the baseline scenario of RBNZ.

    The results of this stress test show the banking system in New Zealand has a good level of resilience and is well-positioned to continue lending to support the economy. In the pessimistic baseline scenario, all banks were able to meet minimum capital requirements. However, capital is projected to fall significantly, requiring plans to restore capital over time. Furthermore, banks are not invincible; the second very severe scenario is an example of a more severe, albeit less likely, scenario in which banks would fall below their regulatory minimum capital requirements without significant mitigating actions, including capital injections. Therefore, strong capital buffers are required to provide resilience against severe but unlikely events. Banks incorporated their modeled results of the pessimistic baseline scenario and very severe scenario into the annual capital management process. 

    The results of this stress test reinforce the importance of bank capital and support decisions that were made as part of the capital review to increase bank capital levels. In December 2019, RBNZ had finalized decisions in its review of the capital adequacy framework for locally incorporated banks, including confirming the proposed increase in regulatory capital requirements from current settings. The implementation of the capital review has been delayed until at least July 01, 2021 and RBNZ will be considering, over the coming months, whether further delays are warranted. The findings of this stress test exercise will help to inform RBNZ decisions on the timing of implementation of the capital review and on any changes to the current dividend restrictions. 

     

    Related Links

    Keywords: Asia Pacific, New Zealand, Banking, COVID-19, Stress Testing, Regulatory Capital, Capital Adequacy Framework, Basel, RBNZ

    Featured Experts
    Related Articles
    News

    PRA to Elaborate on Approach to Transposition of CRD5 by Mid-December

    PRA published a statement that explains when to expect further information on the PRA approach to transposing the Capital Requirements Directive (CRD5), including its approach to revisions to the definition of capital for Pillar 2A.

    November 30, 2020 WebPage Regulatory News
    News

    SRB Sets Out Work Program for 2021-2023

    SRB published the work program for 2021-2023, setting out a roadmap to further operationalize the Single Resolution Fund and to achieve robust resolvability of banks under its remit over the next three years.

    November 30, 2020 WebPage Regulatory News
    News

    EIOPA Consults on KPIs on Sustainability for Non-Financial Reporting

    EIOPA is consulting on the relevant ratios to be mandatorily disclosed by insurers and reinsurers falling within the scope of the Non-Financial Reporting Directive as well as on the methodologies to build these ratios.

    November 30, 2020 WebPage Regulatory News
    News

    US Agencies Issue Statement on LIBOR Transition

    US Agencies (FDIC, FED, and OCC) issued a joint statement encouraging banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021, to facilitate an orderly LIBOR transition.

    November 30, 2020 WebPage Regulatory News
    News

    GHOS Endorses Coordinated Approach to Mitigate COVID Risks for Banks

    The Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of BCBS, endorsed a coordinated approach to mitigate COVID-19 risks to the global banking system.

    November 30, 2020 WebPage Regulatory News
    News

    HM Treasury Extends Consultation Dates for FRF and Solvency II Reviews

    HM Treasury extended the consultation period on Phase II of the Future Regulatory Framework (FRF) Review, from January 19, 2021 to February 19, 2021.

    November 30, 2020 WebPage Regulatory News
    News

    ECB Publishes Guide on Management of Climate and Environmental Risks

    ECB finalized guidance on the way it expects banks to prudently manage and transparently disclose climate and other environmental risks under the current prudential rules.

    November 27, 2020 WebPage Regulatory News
    News

    BCBS Amends Capital Treatment of Non-Performing Loan Securitizations

    BCBS published a technical amendment to the capital treatment of securitizations of non-performing loans by banks.

    November 26, 2020 WebPage Regulatory News
    News

    PRA Policy on Stressed VaR and RNIV Calculations Under Market Risk

    PRA published the policy statement PS23/20 on the calculation of stressed value at risk (sVAR) and risks not in value at risk (RNIV) under the market risk framework.

    November 26, 2020 WebPage Regulatory News
    News

    BoE to Move Statistical Data Collection to BEEDs Portal

    BoE announced that the Data and Statistics Division is planning to move collection of statistical data to the BoE Electronic Data Submission (BEEDS) portal.

    November 25, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 6179