The Reserve Bank is developing a stress testing framework for the nation's lenders to gauge their health in the event of a downturn.
The measure became commonplace since the global financial crisis as bank regulators tested the individual strength of lenders in the event of another crisis, and New Zealand's Reserve Bank wants to set up its own regime which it expects will "form a key component of the Reserve Bank's prudential and financial stability framework," it said in its six-monthly financial stability report.
The central bank is developing the initiative to assess the impact of emerging risks to the financial system, develop capability in identifying and responding to those risks, and provide prospective on the adequacy of lenders' capital buffers, it said.
"As well as providing an indication of the resilience of these institutions in an economic downturn, the exercise is designed to strengthen the stress testing capability of these institutions," the report said. "As capability grows, the Reserve Bank expects stress testing to extend beyond credit portfolios, and to become entrenched as a regular part of risk management process."
Registered banks are already required to conduct internal tests, and subsidiaries of the major Australian-owned lenders have participated in the Australian Prudential Regulatory Authority's regime.
