The Reserve Bank has given the New Zealand finance system a
pass mark while warning some risks remain.
On the eve of Budget 2014, the Reserve Bank's Financial
Stability Report says the country's financial system remains
sound and well placed to support expansion in the economy.
Governor Graeme Wheeler said the banking system was well
capitalised, funding and liquidity buffers were comfortably
above required minimums and non-performing loans continued to
However, several risks to the financial system required
Debt in the household sector remained high relative to
incomes and house prices were overvalued on several measures.
''As a result, financial stability could deteriorate if there
is a sharp correction in house prices, particularly if
accompanied by a reduction in debt repayment capacity.''
The central bank introduced a restriction on high
loan-to-value (LVR) lending in October to help reduce the
risk, he said.
Debt was also elevated in the dairy sector, although incomes
were strong due to high export prices.
A reduction in farm incomes and an associated fall in land
prices could place pressure on some highly leveraged
One risk to farm incomes was a disruption to China's economic
growth, which could result from vulnerabilities in the
A disruption to the Chinese economy could also affect
international capital markets and impair funding conditions
for New Zealand banks, Mr Wheeler said.
ASB chief economist Nick Tuffley said the list of risks
sounded familiar but he believed the FSR had no implications
for the Reserve Bank's official cash rate.
On several of the risks, the Reserve Bank had already taken
The treatment of high-LVR loans had been tightened up and
capital requirements for agriculture lending were lifted
several years ago.
''We expect a degree of adjustment in the overvaluation of
house prices will take place, though the adjustment won't
start in Auckland and Canterbury until higher interest rates
and stronger construction rein in price growth further.
''We expect the reduction in overvaluation will be gradual,
driven by steady rises in incomes that outpace fairly static
Household credit growth appeared to have peaked and the ratio
of household debt to income should resume a gentle decline,
Mr Tuffley said.
The ratio, although well below the pre-global financial
crisis peak, would remain relatively high.
The ratio of agriculture debt to dairy and meat exports had
fallen considerably from its peak, assisted by higher dairy
prices enjoyed over the past years.
Reduced prices would constrain further reduction but dairy
production had been exceptional in recent years, he said.
''We expect a further lift in dairy output of around 4% next
season, even after an estimated 11% growth for this season.
Meat prices are also relatively firm, also assisting returns
for this sector.''
Anecdotally, dairy farmers were using some of their strong
earnings to either reduce debt or build up cash reserves.
Current agricultural credit growth was running at a ''very
subdued'' annual pace of 2.3%.
Farmer behaviour at present was best described as prudent, Mr
Bankers Association chief executive Kirk Hope said recently
reported bank profits were a sign of both the industry's
strength and the buoyant economy, especially compared with
other parts of the world.
''That's good for us at home and our reputation overseas.
Maintaining a successful banking sector is important because
it supports economic growth by helping fund the needs of
businesses and households and providing a safe place for us
to save and invest.''
Bank lending was not driving house prices, Mr Hope said. It
was the lack of housing supply in some parts of the country
that was the problem.
The Government's steps to address supply issues would help.
The association also welcomed the Reserve Bank's move to
review its bank and non-bank regulations to help improve
efficiency, consistency and clarity, he said.
• High household debt
• Overvalued house prices
• High farm debt levels
• Vulnerability of agricultural earnings to a fall in
commodity prices and a slowdown in Chinese growth