Conflict-driven pressures, but banks stay robust
New Zealand’s financial system is facing a tougher global backdrop, but the Reserve Bank says it remains sound and able to support households and businesses.
Releasing the May Financial Stability Report, governor Anna Breman noted that “the global risk environment has worsened over the past six months, as conflict in the Middle East threatens world energy supply,” but stressed that “New Zealand’s financial system is resilient and well positioned to support households and businesses even if economic conditions soften.”
The conflict and closure of the Strait of Hormuz have unsettled energy markets and driven petrol and diesel prices close to their highest levels in the past 50 years in real terms.
Domestically, Breman says the immediate impact has been “rising fuel costs for households and businesses”, with high diesel prices hitting transport, logistics, and exposed primary industries.
The bank now expects a slower economic recovery, softer job growth, and renewed debt‑servicing pressure for some borrowers.
Against that backdrop, the key reassurance for advisers is that major banks still carry strong capital and liquidity buffers and source most funding from domestic deposits. Recent stress tests, updated for new capital settings, indicate banks’ common equity ratios would remain above minimums even under a severe recession scenario linked to worsening geopolitical risks.
Housing risks ‘contained’ but market remains soft
For now, the Reserve Bank judges that housing risks are “contained overall”.
National house prices remain below their November 2021 peak and have been broadly flat for around three years, with elevated listings in Auckland and Wellington weighing on values.
Mortgage lending growth is subdued and arrears have eased back from recent highs as earlier rate cuts filtered through, although both arrears and non‑performing loans are still above pre‑COVID levels.
That softer backdrop shapes how the central bank is using its macroprudential tools.
Debt‑to‑income restrictions, introduced in 2024, are designed to bind mainly in boom conditions, while December’s loosening of loan‑to‑value ratio allowances gives banks more room to approve higher‑LVR loans when risks are judged manageable.
SME credit, insurers and funding shifts to watch
The report devotes a special chapter to small and medium‑sized enterprises, noting that SMEs pay noticeably higher business lending rates than large firms and than comparable borrowers in Australia. Many smaller owners remain reliant on residentially secured lending, linking SME access to credit with house prices and mortgage criteria.
On the funding side, the new Depositor Compensation Scheme has boosted deposits at finance companies and narrowed the term‑deposit rate gap with banks. Regulators are watching closely for any loosening in mortgage underwriting standards, but overall finance‑company housing lending remains a tiny share of the market and largely at low LVRs.
Insurers’ direct exposure to the Middle East conflict is limited, although health insurers have raised premiums after two years of elevated claims, improving solvency. For dwelling insurance, coverage remains high by global standards, but rising costs and climate‑related retreat in some locations could gradually influence collateral values and lender appetite.
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