Risks to the financial system have increased amid global economic uncertainty, but the country’s institutions remain well-placed to support households and businesses.
The Reserve Bank’s (RBNZ) half-yearly Financial Stability Report (FSR) highlighted escalating geopolitical risks, particularly on the back of sweeping import tariffs by the world’s largest economy, the United States.
“While the global economic environment has become more volatile, our financial institutions are in a strong position to support the economy,” RBNZ governor Christian Hawkesby said.
The recent period of high interest rates also meant “non-performing” home loans (loans that were 90 or more days past due) had risen to their highest level in more than a decade.
The RBNZ said around 0.6% of mortgages were defined as non-performing, around 2013 levels.
It said domestic economic activity remained weak as previously high interest rates, rising unemployment, and a weak housing market weighed on demand.
But strong export returns and cheaper borrowing costs were expected to support economic recovery.
Hawkesby said work on reviewing bank capital rules was “well underway”, and the central bank released its terms of reference for the review.
Tariffs pose significant risks
The RBNZ said the direct impact of US tariffs on New Zealand exports could be “severe” for sectors heavily exposed to the US, despite being a small part of the overall economy.
“US tariffs are also expected to have indirect impacts on New Zealand, by targeting our key trading partners and reducing their growth,” the report said. “These indirect impacts of tariffs on our trading partners may carry greater risk to financial stability than direct impacts.”
The RBNZ added that its policies, such as the minimum bank capital requirements, would ensure that banks could withstand most geopolitical shocks.
“There remains significant uncertainty in the outlook for global trade.”
Home loan borrowers ‘mostly resilient’
While the share of home loan borrowers behind on repayments increased, they remained below levels seen in the aftermath of the 2008-09 Global Financial Crisis.
“Unemployment is the main economic factor contributing to borrower financial stress,” the report said. “However, most households remain resilient to high debt-servicing costs.”
It said lenders expected mortgage arrears to stabilise in the coming months as interest rates decreased.
The RBNZ said banks were “well-prepared to manage potential losses”.
“Banks increased provisioning for loan losses in early 2024 as economic activity slowed and credit risk increased,” it said.
By RNZ’s Anan Zaki