Reserve Bank Seeks to Reassure Public Banking System is Sound

The Reserve Bank’s Head of Prudential Supervision, Toby Fiennes, told an Auckland business audience on Thursday that:

“the New Zealand financial system is fundamentally sound and continues to function well.

Our banks are navigating their way through the current turmoil well. Capital positions are well above the minimum levels required by regulation. Credit ratings remain strong. And loss provisioning is not abnormal for this point in the cycle.

The majority of institutions, accounting for over 90 percent of household financial assets, are not directly affected by these current events. These institutions are well capitalised businesses and give no apparent reason for concern.”

More than $3 billion of investor money is now at risk because of the collapse of the finance company sector in the last two years. Sagging investor confidence has also spread to other, higher-ranked, financial institutions, including ING, AMP and AXA which have all frozen funds after a run on funds.

The latest financial instability occurs against the backdrop of a weakening global economy, a low saving rate, and long term investor distrust of the sharemarket after New Zealand’s 1987 stockmarket crash that led to investors switching attention to the housing market. Combined with increased demand as migration has increased, this skewed investment pattern resulted in a speculative bubble in recent years. As in the US, that housing boom has come to an end with prices flattening out or falling. Mortgagee sales have increased markedly in recent months.