RBNZ warns of 'increased' risk to financial system

The Reserve Bank of New Zealand has warned that risks to the country’s financial system are on the rise.

According to RBNZ’s May 2025 Financial Stability Report, geopolitical shocks, volatile financial markets, and subdued local economic activity are creating headwinds for the financial sector. These developments come as house prices remain weak, interest rates begin to ease, and pressure builds across the labour market.

RBNZ Governor Christian Hawkesby made it clear that although New Zealand’s banking system is strong, vigilance is still required.

“Our assessment is that risks to the financial system have increased,” Hawkesby said, speaking at the RBNZ press conference.

“Geopolitical risks highlighted in our previous report have escalated, market volatility has increased, financial market functioning has been strained at times. There is still considerable uncertainty about how this all plays out, including the impact on the global environment and here in New Zealand.”

Housing market weak, but relief from lower rates

National house prices are still sitting around 13% below their peak in November 2021, according to the report, and have shown little movement over the past 12 months. The market remains soft overall, with a high volume of unsold stock and weak net migration limiting upward momentum.

However, RBNZ noted that sales volumes have picked up in recent months as mortgage rates fell – a potential early sign of renewed confidence. Interest rates on 1- and 2-year fixed terms are now around 5%, and advisers may see more demand for shorter-term fixes and floating rates while borrowers await further OCR cuts.

The central bank expects 60% of home loans to reprice to lower rates within six months, and 80% within a year, easing debt serviceability pressures that had spiked when rates hit their peak.

“Domestically, economic conditions remain subdued,” Hawkesby said. “A weak housing market and a weak labour market have weighed on demand. However, lower interest rates and higher agricultural export prices have supported debt serviceability.”

Despite these challenges, the RBNZ has stressed that the banking sector remains in a strong position. Capital and liquidity buffers are robust, and banks are still profitable.

“Our banking system remains resilient with strong capital and liquidity buffers, meaning that it is well-placed to face these risks and others, continuing to support the economy through providing credit even if conditions deteriorate from here,” Hawkesby said.

Regulatory milestones on the horizon

Beyond the economic outlook, there are some major regulatory developments underway.

These include the implementation of the Deposit Takers Act 2023, the launch of the Depositor Compensation Scheme (DCS), and an ongoing review of bank capital requirements.

The DCS, which goes live on 1 July 2025, will protect depositors by insuring up to $100,000 per person, per licensed institution in the event of a deposit taker’s failure. This protection covers deposits at banks, credit unions, and building societies.

“That is a key milestone for us when it comes to implementing the Deposit Takers Act and supporting trust and confidence in the sector,” Hawkesby said.

“Work around our Deposit Takers Act implementation continues at pace, including promoting competition and efficiency. Work for our review of key capital settings in the banking sector is already underway.”

Global uncertainty still looms

While domestic trends in interest rates and housing are critical, the message from the Reserve Bank was loud and clear – New Zealand’s financial system is vulnerable to global shocks.

Hawkesby pointed to recent developments in the US, including abrupt shifts in tariff policy, as examples of how rapidly the global outlook can change.

“Since our last report, we’ve had the Liberation Day speech on the White House lawn, and that looked like quite an extreme scenario in terms of how a trade war might play out,” he said.

“Since then we’ve had an evolution of those tariffs and things have changed, so a less extreme scenario as it currently stands. But there’s still a considerable amount of uncertainty, and where those tariffs end up as the dust settles.”

These risks matter because they affect the functioning of financial markets, the availability and pricing of credit, and the broader business environment for many New Zealand industries, including construction, housing, and banking.

While New Zealand’s banks are well-capitalised and liquid, RBNZ warned that future shocks could emerge quickly.

“We think it’s fair and prudent to make that assessment that those risks have increased, and we still need to be very wary of them,” Hawkesby said.