Reserve Bank says financial system sound but household debt high

1.00pm

The Reserve Bank said in a report out today that New Zealand's financial and banking system was currently sound although some households should be worried about their level of debt.

The bank had "stress tested" the banking system and the system had passed. However, the high level of household debt taken on by some households could make them vulnerable to financial shock and that could flow on to some aggressively-geared non-bank financial institutions.

"A significant slowing of the economy, and of the property market in particular, or higher than expected interest rates, could result in some strains for heavily indebted households," Governor Alan Bollard said.

Difficulties could also be faced by non-bank financial institutions that have taken on greater risk by funding speculative property developments or unproven business.

The bank under Dr Bollard has paid more attention to a breakdown in the financial system and plans to put out six monthly reports.

Dr Bollard said the RB was mindful of the concentration of 85 per cent of New Zealand's banking in the hands of four Australian-owned banks.

He said that bank problem loans were at very low levels which reflected the generally low-risk nature of their lending and the buoyant economy.

Although the RB had placed a greater focus on housing loans, and many houses were highly indebted by international standards, the RB assessed the risk to banks' loan portfolios as modest.

However, non-bank institutions had increased their lending substantially since 1998.

"A slowdown in the property market result in some difficulties for institutions that have achieved rapid growth by taking on more speculative business.

"However, the small size of these institutions suggests that financial distress or failure within the group poses a relatively small risk to the stability of the financial system."

- NZPA