A new video released by the Reserve Bank of New Zealand (RBNZ) explains how the regulator conducts stress tests on NZ's major banks.
RBNZ puts banks under hypothetical scenarios which are "severe but plausible" to see how they would cope.
Examples range from a sharp drop in house prices, dairy prices dropping, unemployment rising, and interest rates spiking. Or most frightening of all - every scenario happening at once.
In other scenarios, RBNZ would test to see how the wider banking system would react to a cataclysm across all banks to see how the collective actions of banks might impact the overall economy.
In New Zealand, registered banks are required to conduct internal stress tests, while the RBNZ will periodically ask banks to run stress tests using a scenario specified by the Reserve Bank.
