18 November 2005
The Reserve Bank today released its Financial Stability Report, a twice-yearly report that assesses the robustness of the New Zealand financial system.
Reserve Bank Governor Alan Bollard commented: "The New Zealand financial system, overall, is well placed to weather a possible slowdown in the economy. The economic expansion of recent years has been reflected in strong financial sector balance sheets, and levels of trading in financial markets that have given them depth and liquidity.
"However, these same developments have also sown the seeds for a more testing time ahead. Household indebtedness has continued to climb, relative to household incomes, and house prices have become more inflated. Farm debt and farm land prices also appear stretched.
"A counterpart to these developments has been a further widening of the balance of payments current account deficit, to 8 per cent of GDP. This deficit is very large by OECD standards and is not sustainable over the medium term.
"Adjustment to these imbalances, if abrupt, could test the resilience of the financial system.
"In financial markets, large imbalances invariably trigger changed risk assessments at some point. These can be abrupt and can result in financial market volatility.
"There are also implications for borrowers, and for the lending institutions. Adjustment to imbalances will mean changes in the circumstances facing many households and firms, and possible strains on the abilities of some to service debt.
"We do not see those strains as spilling over to the financial system on a scale that would undermine its overall stability - though specific stresses cannot be ruled out.
"All in all, the risk conditions facing the financial system over the next six months could be more testing than during the past six months. Maintenance of ongoing financial stability will require prudent management and pricing of risk by all participants - by those who borrow, by the institutions that lend, and by those who invest in the financial markets."
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