Banks OK now but insurers vulnerable
Unemployment could rise to 18 per cent, house prices could halve, and the viability of the banks could be ‘‘called into question’’ if the coronavirus prompted a further period of economic lockdowns, the Reserve Bank has warned.
The central bank said in its annual report on financial stability published yesterday that banks had coped well with the coronavirus pandemic so far. But under ‘‘severe enough scenarios, the viability of banks would come into question’’, it warned.
In the event of its worst-case lockdown scenario, ‘‘initial modelling suggests that, without significant and timely mitigating actions, banks would fall below minimum capital requirements under this scenario,’’ it said.
The Reserve Bank has also cautioned that some other financial institutions that take deposits from the public, and some life insurers, are already more vulnerable. Several insurers were exposed to investment losses because of movements in interest rates, bond spreads and equity prices, it said.
The Reserve Bank said the situations that could result in its worst-case scenario were ‘‘broadly based’’ on the country having to return to a level 4 lockdown for about eight weeks and a worsening of the world economy that resulted in a ‘‘credit crunch’’.
Deputy governor Geoff Bascand said that model was ‘‘not strictly based on the time in lockdown’’. ‘‘It is the economic results that are running though that scenario that really matter.’’
Commenting on the bank’s report, governor Adrian Orr appeared to highlight the positives, saying that the financial system was in a solid position to weather the ‘‘significant economic impact caused by the Covid-19 pandemic and support New Zealand’s recovery’’.
Banks entered the crisis with significant capital and liquidity buffers, he said.
‘‘These buffers can now be used to support their customers’ long-term economic future.’’
But despite banks’ good position, the Reserve Bank forecast the resilience of the banking system would be ‘‘tested in the coming months’’.