New Zealand household debt remained at relatively high
levels and many borrowers were still vulnerable, especially to
any correction in house prices, Reserve Bank Governor Graeme
Wheeler said yesterday.
Debt in parts of the agricultural sector also remained high,
leaving the sector exposed to a fall in export prices.
In his first financial stability report, Mr Wheeler
acknowledged households and companies had generally continued
to reduce their reliance on debt.
The central bank was more positive about the New Zealand
financial system, partly reflecting measures taken by banks
to build up capital buffers in line with the increase in the
minimum core funding ratio due at the beginning of next year.
Deputy governor Grant Spencer said banks were well placed to
meet the increase in the minimum core funding ratio from 70%
to 75% on January 1.
"We are continuing to strengthen the financial system,
drawing on the lessons from the global financial crisis."
The bank was implementing the main elements of the Basel III
capital adequacy regime, he said.
The Reserve Bank was putting in place a new prudential and
licensing regime for the insurance sector, working with banks
to pre-position their systems for Open Bank Resolution and
reviewing statutory powers for overseeing the payment and
settlements systems, Mr Spencer said.
New Zealand Bankers Association chief executive Kirk Hope
said the banking sector's core funding ratio was around 84%,
well above the Reserve Bank's present minimum ratio of 70%.
That meant banks were sourcing more funds from domestic
savings and longer-term wholesale funds and were less reliant
on shorter-term overseas funding. Banks were also set to meet
the central bank's new minimum level of capital they must
hold, which was based on the Basel III levels, Mr Hope said.
While banks were showing an improved return on equity, it
remained below levels before the global financial crisis due
to the need to raise capital buffers.
"On top of this, interest rates remain at historical lows and
competition among banks is high."
The reduction in the average net interest margin to 2.25% in
the June quarter recognised the competition among banks, he
Mr Wheeler said global economic activity was weak and that
affected emerging markets, including China.
The euro area was fragile given the structural issues facing
the region. Global growth could be further undermined by
substantially tighter fiscal policy in the United States.
Financial market sentiment had improved in recent months,
reflecting further monetary easing in the major economies and
various measures to support the financially distressed euro
"This has helped New Zealand banks access global funding
markets but has also contributed to the strength of the New
Zealand dollar," he said.
ASB economist Christine Leung said the financial stability
report was not designed to have monetary policy implications.
However, the report highlighted the Reserve Bank's concern
about the continued high level of household debt and the
potential for a sharp correction in house prices.
"The Reserve Bank attributes much of the continued strength
of the New Zealand dollar to the more positive growth outlook
of the New Zealand economy. This suggests it views the
current level of the currency as justified and that it is not
appropriate or feasible to lean against it."
The central bank was expected to keep the official cash rate
on hold at 2.5% until September of next year, Ms Leung said.
• Global banking regulators sealed a deal, in September 2010,
to effectively triple the size of the capital reserves the
world's banks must hold against losses, in one of the most
important reforms to emerge from the financial crisis.