Global financial crisis still affecting NZ, says RBNZ

"Despite the recent pick-up in world equity markets, New Zealand continues to be impacted by the global financial crisis," Deputy Governor, Grant Spencer, said today when releasing the Reserve Bank's May 2009 Financial Stability Report.  

"Major government interventions have eased stresses in the international credit markets, but the adverse second-round effects of the financial crisis on global economic activity and commodity prices will take some time to play out," he said. 

"These global pressures are encouraging a recovery in household savings which should contribute to an improvement in New Zealand's external balance over the next few years.  Recent monetary and fiscal policy measures will help to ensure that the adjustment to more sustainable debt levels is an orderly one.

"The banking system has continued to lend to households and businesses over the past year, but credit growth has slowed in recent months, lending criteria have tightened and some businesses are reporting difficulties in obtaining credit.  While current conditions warrant caution, it is important that the banks continue to lend to creditworthy borrowers."

Mr Spencer said New Zealand has been fortunate that its banking system has not experienced the distress seen in some countries.  However, while the overall asset quality of the banks remains strong, impaired assets have increased sharply since late last year. 

"Provisioning is expected to rise further over the year ahead as business profits weaken and unemployment rises.  Banks must ensure that they make adequate provisions and maintain capital levels sufficient to absorb further unexpected losses." 

As discussed in earlier Financial Stability Reports, New Zealand banks remain vulnerable to external financial shocks as a result of their dependence on offshore borrowing.  Conditions in the funding markets had improved since late 2008 and one bank had issued offshore term debt using the Government's wholesale guarantee.  Mr Spencer said banks need to lengthen the maturity structure of their funding to reduce their vulnerability to offshore market disruptions.  The Reserve Bank's new prudential liquidity policy, to be released around the end of May, will help to reinforce this objective. 

Lending by the non-bank sector is continuing to contract, despite the easing of liquidity pressures as a result of the Government's Deposit Guarantee Scheme.  Asset quality has continued to deteriorate as a result of the economic downturn and the weak property market in particular.  In the medium term, higher standards across the non-bank sector are likely to be reinforced by the new prudential regime, which the Reserve Bank is currently implementing.     

Assessing and countering potential threats to financial stability in New Zealand will remain a high priority for the Reserve Bank while the effects of the global crisis persist, Mr Spencer said.