Reserve Bank of New Zealand, Financial Stability Report, May 2018

Transcription

1 I.3E Reserve Bank of New Zealand, Financial Stability Report, May 2018 Report of the Finance and Expenditure Committee Fifty-second Parliament (Michael Wood, Chairperson) June 2018 Presented to the House of Representatives Michael Wood Chairperson

2 I.3E FINANCIAL STABILITY REPORT, MAY 2018 Contents Recommendation... 3 Introduction... 3 Summary of the Financial Stability Report... 3 High levels of household debt... 4 Vulnerabilities around dairy sector debt... 5 The Bank Financial Strength Dashboard... 5 Appendix

3 FINANCIAL STABILITY REPORT, MAY 2018 I.3E Reserve Bank of New Zealand, Financial Stability Report, May 2018 Recommendation The Finance and Expenditure Committee has examined the Reserve Bank of New Zealand s Financial Stability Report, May 2018, and recommends that the House take note of its report. Introduction One of the Reserve Bank s main functions is to support the stability and efficiency of New Zealand s financial system. The Financial Stability Report (FSR) is a six-monthly assessment by the Reserve Bank of potential risks to the financial system. Our report summarises the main points from the FSR published on 30 May 2018, and the key issues we discussed during our hearing with the Governor of the Reserve Bank. Summary of the Financial Stability Report The FSR notes that the vulnerabilities in the financial system have not changed much since the previous FSR in November However, the slowing of growth in both lending and house prices has lessened risks to the financial system. Household and dairy sector debt Household debt levels are still high, but are rising less quickly than before. The Reserve Bank still has loan-to-value ratio (LVR) restrictions in place, which has helped to slow the growth of lending and house prices. This subdued lending growth needs to be further sustained before the Reserve Bank considers easing the LVR restrictions. There are still high levels of debt in the dairy sector, but these are concentrated among a few borrowers. Most dairy farms are cash-flow positive, but the highly-indebted are vulnerable to the possibility of a downturn in dairy prices or an agriculture shock. The Reserve Bank notes that reducing debt in the dairy sector would require banks to adopt more prudent lending practices. The Bank identifies this issue and the high levels of household debt as risks to be monitored. The governor noted that the banks allocative efficiency is an area in which the desire for short-term profitability can get in the way of long-term sustainable and responsible lending. Reliance on offshore funding New Zealand banks rely on international funding markets. This exposes them to international risks that could disrupt the markets. In the last year, banks have been able to reduce their reliance on offshore funding by growing customer deposits and seeking funding at longer terms. However, the Reserve Bank notes that international developments could affect the banks ability to access global funding markets. If there was a rapid increase in global 3

4 I.3E FINANCIAL STABILITY REPORT, MAY 2018 interest rates, the cost of accessing funding would increase for New Zealand banks. This would mean that borrowing costs would increase in New Zealand. Probity of the banking and insurance sectors The FSR notes that public trust is an important factor for the stability of the banking and insurance industry. Australia s ongoing Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has illustrated the need for cultural improvements in its financial system. The Reserve Bank and the Financial Markets Authority have asked New Zealand banks to explain why they believe their New Zealand subsidiary operations are unlike their Australian counterparts, and that there are no system-wide issues of misconduct in the New Zealand banking and life insurance sectors. We intend to follow this issue closely. High levels of household debt The FSR calls New Zealand s high level and concentration of household debt the largest single vulnerability of the financial system. Households with high levels of debt are vulnerable to having their debt servicing capacity reduced by developments such as higher interest rates or a change in financial circumstances. This could lead to households defaulting on their loans and creating losses for their lenders. Widespread cases of this could reduce incomes and lead to an economic downturn. The FSR notes that, although growth in household debt has slowed and house price inflation has stabilised, the financial risk has not changed materially since the FSR in November We note that the Reserve Bank has been concerned for some time about the risks stemming from high household debt, and asked whether it intends to do more to help lessen the risk. The governor indicated a reluctance to be more actively involved, but noted that the issue has not been able to regulate itself. We heard that the second round of the review of the Reserve Bank of New Zealand Act 1989 will take place soon. The Bank will examine possible new tools to help moderate household debt when it sees specific pockets of excess. However, the governor again expressed a preference for the Reserve Bank to help address the culture and behaviours before introducing further regulations. House price growth appears to be stabilising We asked whether the Reserve Bank is confident that house price growth in New Zealand has stabilised. We noted that, while Auckland prices appear to have stabilised, house price growth is still increasing in several regions. The Bank said that, overall, house prices seem to be moderating, and credit growth is reasonably restrained. At this stage, the Bank sees that the most rapid growth appears to be occurring in pockets of sales, rather than as sustained rises in active markets. The FSR lists a potential fall in house prices as a possible risk to the banking sector. We heard that, although a fall in house prices would hurt homeowners, it would take a very significant drop in prices before banks took heavy losses. The Reserve Bank s simulated 4

5 FINANCIAL STABILITY REPORT, MAY 2018 I.3E stress tests showed banks remaining solvent despite losses from a 40 percent decline in house prices. Restrictions on high loan-to-value ratios will remain in place this year The Reserve Bank reviews its LVR restrictions every six months. After easing them slightly towards the end of 2017, it has decided to leave them unchanged for the next six months. The governor said that one of the difficulties in deciding whether to remove or ease the restrictions is the behaviour of banks, and whether bank lending would remain prudent in the absence of LVR restrictions. The Reserve Bank intends to observe credit growth as it eases off LVR restrictions before it considers removing the restrictions entirely. Vulnerabilities around dairy sector debt Dairy sector indebtedness increased significantly between 2014 and 2016, when low global dairy prices forced many farms to borrow to meet operating costs. Around 20 percent of the dairy sector s loans are being closely monitored because of concerns about the borrowers financial strength. This reflects the fact that approximately 20 percent of dairy farms carry 80 percent of the sector s debt in New Zealand. We heard that rural lending equates to about 10 percent of total lending in New Zealand. This means that events causing farms to default on debts would have to be very significant to create a large systemic problem across the banking sector. However, some banks have higher concentrations of rural debt, and the high concentration of farms carrying the debt means that some banks are much more exposed to the risk of default. Dairy prices have now increased and appear to have stabilised at the higher level. The Reserve Bank expects 90 percent of farms to be cash-flow positive. This figure is unchanged since the last Financial Stability Report in November. The high level of debt in the dairy sector makes the sector vulnerable to shocks. The recent spread of the Mycoplasma bovis disease presents a risk to the dairy sector, with a number of uncertain variables. The extent of the spread and the response by the industry and the Government will affect the disease s impact on the industry. We heard that the risks to the financial sector are likely to be low, as the Government and industry bodies have agreed to cover most of the costs. The Bank Financial Strength Dashboard The Reserve Bank has released its Bank Financial Strength Dashboard. This is an online tool that shares prudential and financial information about New Zealand s banks. The Reserve Bank intends the dashboard to help make prudential information easily accessible and comparable. The Bank noted that the tool provides relevant information to help inform its users financial decisions. It will update the dashboard every three months with information that banks provide to the Reserve Bank. The Bank hopes that the ease of accessing and using the dashboard will help enhance market discipline by the public and the financial sector. It also hopes that the dashboard will 5

6 I.3E FINANCIAL STABILITY REPORT, MAY 2018 help to improve the self-discipline of the banks themselves by increasing the incentives for banks to act appropriately and making it easier for the banks to compare themselves with their peers. 6

7 FINANCIAL STABILITY REPORT, MAY 2018 I.3E Appendix Committee procedure We met on 30 May and 20 June 2018 to consider the Reserve Bank of New Zealand s Financial Stability Report for May Committee members Michael Wood (Chairperson) Hon Amy Adams Kiritapu Allan Andrew Bayly Rt Hon David Carter Tamati Coffey Hon Judith Collins (from 20 June 2018) Ian McKelvie Willow-Jean Prime Dr Deborah Russell David Seymour Fletcher Tabuteau Dr Duncan Webb Lawrence Yule (until 20 June 2018) Advice and evidence received We heard evidence from the Reserve Bank of New Zealand and received advice from our independent specialist advisor, Toby Moore. The advice and a transcript of our hearing are available on the Parliament website, 7