MNI Policy: Bank Capital Levels Short in Severe Scenario: RBNZ

A stress test of commercial banks by the Reserve Bank of New Zealand has found that under the most severe scenario modelling, capital levels would fall below regulatory minimums and would require "significant mitigating action".

The RBNZ today released the results of its test, conducted in two parts: a desktop analysis estimating the impact on nine of New Zealand's largest banks and a second process in which the top five banks used their own models.

The pessimistic baseline scenario was a one-in-50 to one-in-75 year event with the unemployment rate rising to 13.4 percent and a 37 percent fall in property prices.

UNEMPLOYMENT RATE

In the very severe scenario, the unemployment rate reaches 17.7 percent and house prices fall 50 percent.

"The overall conclusion from the Reserve Bank's modelling is that banks could draw on their existing capital buffers and continue lending to support lending in the economy during a downturn of the severity of the pessimistic baseline scenario," the report said.

"However, in the more severe scenario, banks capital fell below the regulatory minimums and would require significant mitigating actions including capital injections to continue lending.

"This reinforces the need for strong capital buffers to provide resilience against severe but unlikely events."

CAPITAL REVIEW

A RBNZ Capital Review last year recommended an increase in capital levels by New Zealand banks, but this was put on hold as a result of measures to combat the impact of Covid-19.

The RBNZ said the stress test findings would help inform its timings on the implementation of changes to capital requirements.