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Resilient banking sector gets IMF advice

NZ Newswire logoNZ Newswire 9/05/2017 Paul McBeth

New Zealand's major banks should be able to withstand a severe economic downturn, with profits helping cushion the blow, but could use deeper capital buffers, says the International Monetary Fund.

In one of two reports on New Zealand, the global body of 189 member countries set up to foster international monetary cooperation, recommends the Reserve Bank raise the minimum levels capital lenders need to hold to absorb losses.

This would help strengthen the macroprudential framework, with the system dominated by the four Australia-owned banks.

"Direct exposures among the four largest banks are relatively limited, but the potential for spillovers is elevated," the IMF report said.

"One of the important channels for spillovers is the reliance on overseas funding, which could lead to a tightening in the system in case of problems in one bank."

The Reserve Bank is currently reviewing its capital adequacy rules and is expected to move in tandem with its trans-Tasman counterpart, the Australian Prudential Regulation Authority which is looking at the same issue in Australia.

The heads of Westpac New Zealand and Bank of New Zealand were relatively sanguine about the need for capital review, which is following an international trend demanding greater financial backstops for lenders.

IMF stress testing found New Zealand's major banks could withstand a severe shock where a global slowdown and slump in commodity prices triggered a deep recession, driving up unemployment and causing a slump in house prices.

The modelling found the banks' capital ratios would meet minimum standards, but breach the regulated buffer as they absorbed credit losses and funding costs.

"Banks are able to retain capital through profitability despite the erosion in margins, supporting capital ratios during the downturn," the report said.

The IMF found Reserve Bank staff to be "highly competent", but that they had "insufficient resources" which were "an impediment to enhancing the effectiveness of the three pillar approach''.

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