The 2025 stress test subjected the five biggest banks to ‘severe but plausible’ scenarios
New Zealand’s five largest banks would be able to weather a severe economic storm and escalating geopolitical tension, according to the Reserve Bank’s latest stress test results.
The 2025 Bank Industry Stress Test subjected ANZ, ASB, BNZ, Kiwibank, and Westpac New Zealand – collectively representing 91 percent of bank lending in the country – to two hypothetical but plausible nightmare scenarios.
In the most severe case, banks faced a triple threat: New Zealand's economy contracting by 6.5 percent over three years, unemployment soaring to 10.5 percent, and house prices falling by 35 percent.
A second scenario added a liquidity crisis, with each bank facing a cyber-attack triggering massive deposit outflows and a closure of wholesale funding markets.
A third scenario looked at the effects of a hypothetical failure of a strategic transformation project, such as an IT system upgrade, independent of any geopolitical risks.
Despite these severe conditions, all five banks maintained their solvency in each scenario. However, the Reserve Bank also noted that it would take “time and significant actions” to restore capital ratios to current levels under scenario 1.
When researchers tested what would happen if house prices fell an additional 10 percent beyond the base scenario, mortgage impairments increased by 40 percent. This non-linear relationship between property values and credit losses shows how quickly conditions can deteriorate once certain thresholds are crossed.
Feedback provided to the banks
When asked about variations in individual bank performance, an RBNZ spokesperson told NZ Adviser that there were some variations – however, that confidence is maintained in the overall system.
“As in our past stress tests there was variation in the individual bank results due to differences in starting capital position, underlying profitability, differences in lending mix, and differences in modelling,” the spokesperson said.
The Reserve Bank noted that conclusions on best practice were drawn on qualitative information, stress testing methodology, and mitigating actions provided by the banks. Each bank is given individual, confidential feedback based on these assessments.
“We reviewed the individual results and the variation was within our risk appetite,” the Reserve Bank said. “Although we do not publish individual bank results, we provide anonymised peer comparisons to the participating banks to inform their modelling.”
These stress test results arrive at an important moment for New Zealand's banking regulation. The RBNZ is currently reviewing its key capital settings, with decisions expected before year's end.
Looking ahead, the Reserve Bank says it is open to conducting a similar test on New Zealand’s smaller lenders.
“We are considering running a similar exercise to the geopolitical scenarios for smaller banks in 2026,” a Reserve Bank spokesperson said.
“In this case we will update the scenario to reflect changes in the risk outlook for the global trade environment. Our stress testing is on an annual frequency. As part of banks' capital management they design their own internal stress tests and should be considering the latest geopolitical risks.”
For borrowers and advisers, this will be largely reassuring: New Zealand's banking system can withstand severe shocks.
