New Zealand's financial system remains sound but risks from weaker dairy prices and Auckland's overheated housing market have risen, the Reserve Bank says in its latest Financial Stability Report.
Reserve Bank governor Graham Wheeler (file photo). Photo: RNZ / Diego Opatowski
The latest six-monthly review, released this morning, assesses the health of the banks and other deposit-taking institutions, the insurance sector and the payments system in New Zealand. It highlights potential risk areas and measures the Reserve Bank is taking to respond to them.
The November report said New Zealand banks were profitable and well capitalised.
But Reserve Bank Governor Graeme Wheeler said the outlook for the international financial system had deteriorated due to faltering growth and investors taking on riskier lending in search of better returns.
"This environment creates risks for the New Zealand banking system, which remains reliant on the global markets for funding."
In New Zealand, housing and dairy prices were weighing on banks.
Indebted dairy farmers faced a second season of below break-even incomes due to low global prices.
"Prices have shown some recovery since August, but many indebted farms are coming under increased pressure, which would be exacerbated if low dairy prices are sustained or dairy farm prices fall significantly.
House prices in Auckland had increased sharply, due to investors taking advantage of low interest rates. "House price-to-income ratios in the region [are] now comparable to those seen in some of the world's most expensive cities."
While the Reserve Bank had taken steps to cool home lending and strengthen banks' balance sheets, Mr Wheeler said, a sharp downturn could challenge financial stability, given the large exposure of the banking system to the Auckland housing market.
Reserve Bank deputy governor Grant Spencer said banks' losses from their exposure to the dairy sector were expected to be manageable, but they need to ensure they set aside realistic provisions for the likely increase in problem loans.
"The banks are working with dairy farmers experiencing difficulty, and it is important that they continue to take a medium-term view when assessing farm viability."
The Reserve Bank is also closely monitoring rising house prices in areas such as Hamilton and Tauranga. It recently eased lending restrictions outside Auckland where activity had been more subdued.