7 May 2025 – Risks to the financial system have increased over the past six months, Reserve Bank Governor Christian Hawkesby says in releasing the May 2025 Financial Stability Report.
“Financial stability is critical for ensuring that New Zealanders can safely save, borrow, and manage financial risk,” Mr Hawkesby says. “While the global economic environment has become more volatile, our financial institutions are in a strong position to support the economy.”
Geopolitical risks have escalated, particularly following the US imposition of sweeping tariffs on goods imports from many countries, including New Zealand. These developments have heightened financial market volatility and pose a material risk to global economic activity.
Domestically, economic activity remains subdued. Previously high interest rates, rising unemployment, and a weak housing market continue to weigh on demand. However, lower borrowing costs and high agricultural export prices are supporting debt serviceability.
Banks have strong capital and liquidity buffers in place to maintain credit flows even if conditions deteriorate further. They also remain profitable, with non-performing loans expected to decline as mortgage rates reprice lower.
General insurers are experiencing more stable conditions. Our recent insurance stress test highlighted improved resilience in the sector, but also the challenges of extreme seismic events for New Zealand.
Progress is continuing on the implementation of the Deposit Takers Act 2023. Several strands of this work will help to promote competition and efficiency in the deposit-taking sector.
“Work on the review of key bank capital settings is well underway, with the release of the Terms of Reference today. This outlines the purpose, approach, and scope of the review, to ensure the right settings are in place to support financial stability and promote the wellbeing and prosperity of New Zealand,” Mr Hawkesby says. “We will engage leading international experts to inform and challenge our review.”
The Depositor Compensation Scheme will come into effect on 1 July 2025. This will protect depositors’ funds in the event of a deposit taker failure and is a significant milestone for enhancing trust and competition in the financial system.
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Stress Tests are a critical tool we use to assess potential vulnerabilities, support risk management, and inform policy and supervisory decisions
