Improving New Zealand's banking system post-crisis

Improving the resilience of New Zealand’s financial system has been an important focus for the Reserve Bank since the global financial crisis. The efficiency of the system in providing financial products and services to the rest of the economy also needs to be considered, says Reserve Bank Governor Dr Alan Bollard.

In a speech delivered to the NZ Shareholders Association in Tauranga this morning, Dr Bollard said banks play the dominant role in New Zealand’s financial system. They remained relatively resilient to the global financial crisis and the resulting slowdown in economic activity.

“Our banks remained sound. They stuck to their knitting over the boom, engaging in very profitable lending to households and the rural sector in the main, without resorting to the sort of exotic financial innovations witnessed elsewhere,” he said.

The Reserve Bank’s efforts to reinforce the soundness of the banking system for the future have been centred on implementing stronger capital and liquidity standards; determining the role of various macroprudential tools in managing system-wide risks; and improving the resolution framework for dealing with bank failures.

Prior to the global financial crisis, New Zealand and Australian banks look to have been among the most cost-efficient and profitable in the OECD. While high rates of return could be seen as evidence of a lack of competition, the interest margins earned on products like residential mortgages were not particularly high relative to other countries.

However, operating conditions for banks have changed profoundly since the financial crisis, with regulatory changes, weak credit demand by households and businesses, and higher funding costs all likely to affect financial performance.

“All things considered, it seems unlikely that the rates of return in banking enjoyed over the past decade can be sustained in the future,” Dr Bollard said.