Turbulent global markets continue to affect NZ

Risks to New Zealand’s economy and financial system have increased in recent months, Reserve Bank Governor Alan Bollard said today, when releasing the Bank’s November 2011 Financial Stability Report (http://www.rbnz.govt.nz/finstab/fsreport/)

“Despite progress in reshaping regulatory frameworks, financial systems in many countries remain under stress due to an overhang of private and public debt. Markets have been particularly concerned about the sovereign debt situation in Greece, and the potential for contagion to other European countries. This has made access to offshore debt markets more challenging for New Zealand’s banks.

“In New Zealand, households and businesses have been containing debt, which has helped to reduce the country’s overall external imbalance. However, these efforts have been offset, in part, by rising levels of public debt.

“Further, many households and farmers remain highly leveraged, which leaves them vulnerable to a sharp slowdown in global growth.”

Deputy Governor Grant Spencer said the New Zealand banking system is better placed to weather the current market turbulence than at the outbreak of the financial crisis in 2008.

“The banks have increased their capital and liquidity buffers over the past few years. They now have a stronger retail deposit base and their wholesale funding is at longer terms, making the banks less vulnerable to disruptions in offshore markets.

“Given the current market tensions, however, the Reserve Bank has decided to defer by six months its planned further increase in the core funding ratio (CFR) which was to have occurred in July 2012. It is now intended that the CFR will increase from 70 percent to 75 percent on 1 January 2013, giving the banks more latitude in managing their funding programmes.

“We have continued to progress a number of regulatory policy initiatives. We are currently consulting with the banks on the new Basel III capital regime, with an expectation that capital requirements will be increased to match the new international standards. We have also been in discussion with the banks on pre-positioning their systems for Open Bank Resolution.

“In the insurance sector, the Bank has issued new solvency standards for insurers and is currently processing applications under the new licensing regime,” Mr Spencer said.