Thanks in part to the build up of capital since the GFC, New Zealand’s banking sector is “well placed to withstand a stagflation scenario of high inflation and low or negative economic growth”, said the Reserve Bank of NZ, following the latest Bank Solvency Stress Test.
It was the first stress test since 2014 that involved high interest rates.
The New Zealand OCR has already risen to 3.5 per cent and further rises are expected. Largest lender ANZ’s two-year, fixed-rate home loan interest rate is currently 6.19 per cent for borrowers with 20 per cent or more equity.
Despite the banks being able to cope with the “severe but plausible” scenario modelled, the “combination of this stress event and rising capital requirements could make it difficult for banks to meet the new capital requirements when they are fully implemented in 2028,” said the RBNZ.
The stress test modelled falling house prices of 42 per cent, equity price falls of 38 per cent, unemployment of 9.3 per cent, a 5 per cent contraction in GDP, and the OCR peaking at 5.5 per cent. Under this scenario, the aggregate Common Equity Tier 1 ratio in the stress test fell 3.3 percentage points to a minimum of 8.9 per cent before mitigants, well above the 4.5 per cent regulatory minimum.
“That said, this would be a challenging macroeconomic environment for households and businesses with a large number of bank customers unable to repay their loans and experiencing large declines in wealth,” the RBNZ said.
The modelling showed 11.2 per cent of all bank home loans would default under the stress-test scenario, and over 18 per cent of small and medium-sized businesses would default on one or more repayments.
“Bank profits are negative in year 2 of the stress test. The combination of negative economic growth, rising interest rates and increasing unemployment lead to high levels of defaults whilst falling asset prices reduce the collateral banks hold to minimise losses in the event of a default.”
A 1-in-25 year cyber security breach was also modelled in the stress test, and this led to aggregate losses of NZ$1.3 billion.