NZ Banks “well placed to withstand stagflation” – RBNZ

The sector was examined for its ability to withstand twin assaults from high inflation and a shrinking economy – so-called stagflation.

The RBNZ does a test like this every year – dubbed the Bank Solvency Stress Test.

Its latest analysis assumed a global slowdown in economic activity at the same time as central banks raised interest rates due to high inflation and the lingering impact of Covid 19.

According to this scenario, house prices fell 47%, the sharemarket 38%, unemployment rose to 9.3%, GDP slipped by 5%, and the OCR and the 2-year fixed mortgage rate were at 5.5% and 8.4% respectively.

Despite these grim developments, the banks would get by, according to the RBNZ Deputy Governor, Christian Hawkesby.

“Although banks’ capital buffers would be reduced in such a scenario, they would still remain well above our regulatory minimum,” he said.

“That is thanks in part to the build-up of capital since the 2008 Global Financial Crisis, which enables them to continue to support their customers and the economy.”

He added the results from this stress test would help the RBNZ to continue monitoring, managing and assessing the risks of regulated banks.

In its summary of the results, the Reserve Bank added a rider: this stress test focused on bank capital and did not attempt to cover a liquidity stress such as a severe outflow of bank deposits.

But the stress test did show that while the amount of Tier 1 capital in the banking sector would fall under this scenario,it would remain well above the minimum required by regulation.