Banks performed well in stress tests, insurers may be vulnerable

by Ksenia Stepanova05 Jun 2020

New Zealand’s banks are in a strong position to withstand the “severe” economic downturn, according to the Reserve Bank - though insurers may be in a slightly more vulnerable position if we face a longer period of unemployment.

Speaking to Financial Advice New Zealand members, Reserve Bank deputy governor Geoff Bascand noted that New Zealand’s banks have strong capital buffers and relatively low levels of high-LVR loans, and are in a stronger position today than they were before the start of the 2008 GFC. However, he also says the current economic downturn is likely to cause pain for some time, especially for businesses without good short-term resilience.

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“The broad picture of nearly all economic forecasters is that this is a very, very severe economic downturn,” Bascand said.

“Our examination is of how well the financial system will be able to withstand this shock, and keep doing what we want it to do in terms of carrying on lending, providing insurance and providing financial services.

“In some sense the biggest shocks have already occurred, and the world is still suffering heavily from this pandemic. This has got a long way to play out.”

Bascand says that some life insurers in particular haven’t responded as well as major banks to stress tests, and that they need to be mindful of building resilience and planning for financial shocks. He says the economic difficulty is likely to last for many months, but the solid state of the banks is going to significantly help cushion the blow.

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“We’ve said for some time that a number of the life insurers have got low solvency buffers and we’ve been strengthening those and imposing conditions on them,” he explained.

“We’ve done stress tests of insurers, and there are a few that could potentially be vulnerable if we had a long, protracted period of unemployment with low interest rates and low investment rates.”

“We see the economic consequences still coming with a lot of pain in the coming months,” he added.

“A great part of the business sector doesn’t have much resilience in a short-term sense – a couple of months without revenue really hurts. But the good news is that we started this crisis with banks in a much better state than they were in 2008, and they have an incredibly important role in reducing the impact of this crisis – they can do that when they’re better capitalised.”

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