Financial system resilient amid heightened global risks
The Reserve Bank of New Zealand's latest Financial Stability Report finds the country's financial system resilient despite heightened global risks. The report highlights the Middle East conflict as a key source of uncertainty for trade, financial markets, and cyber security.
Conflict channels: Trade, markets, cyber
The report details how the Middle East conflict impacts New Zealand's financial system through three main channels.
Firstly, trade is affected by higher oil prices and broader economic uncertainty, potentially hindering debt servicing for households and businesses, particularly in transport and primary sectors.
Secondly, global financial markets face increased volatility, raising the risk of sharp equity price falls and higher borrowing costs for banks, which source a fifth of their funding offshore.
Existing concerns about stretched valuations in technology and private credit markets are exacerbated.
Lastly, cyber risk is elevated due to increased digitalization and geopolitical events, with AI adoption potentially adding to vulnerabilities, though no material impacts have been observed to date.
Banks well-placed, insurers mixed
New Zealand's banking sector remains well-positioned to support customers and maintain lending, even under worsening economic conditions.
Banks are strongly funded with high deposit levels, offering flexibility to manage offshore funding market volatility, and possess robust capital buffers.
Stress tests indicate banks can manage severe scenarios, despite recent changes to minimum capital requirements.
Insurers face mixed conditions; general insurance profitability is favorable, with war exclusions limiting direct Middle East conflict impacts.
Health insurers have raised premiums due to rapidly increasing claims costs, and stress tests for life and health sectors are underway.
Resilience tested by ongoing uncertainty
The report confirms the financial system's resilience, yet it highlights the fragility of global conditions, especially from geopolitical events.
While direct impacts are limited, the interconnectedness of risks means ongoing vigilance is paramount for stability.
The RBNZ's continuous monitoring and proactive stress testing are thus crucial for maintaining this resilience against evolving threats.