Resilient banks, a resilient economy

Published in KPMG’s Financial Institutions Performance Survey 2015, 24 February 2016

In the past year New Zealand’s economy has faced numerous challenges – dairy prices fell, commodity prices decreased, growth in China slowed, and the housing market remained constrained as demand continued to outstrip supply – yet New Zealand’s banking sector remains stable. How have our banks remained resilient while facing risk in global and local environments?

A world-class banking system

New Zealand has established a well-capitalised, world-class banking system, and is known to be one of the most competitive globally. As outlined in the Reserve Bank of New Zealand’s Financial Stability Report (November 2015), our banks are well-funded with capital and liquid assets well above regulatory requirements.
While the International Monetary Fund in its November 2015 report noted a challenging outlook for New Zealand’s economy, it acknowledged New Zealand remains resilient due in part to banks being well-capitalised and employing stress tests to help ensure the sector can withstand volatility in housing, trade and economic markets, and that banks continue supporting the agricultural sector as it faces lowering prices.
New Zealand’s banks have remained stable and self-sufficient against the stresses or fluctuations in the global environment. This was evident during the Global Financial Crisis (GFC), and more recently the Greek debt crisis and slowdown in China’s economy.
The competitiveness of our market has been noted by the World Economic Forum, which ranked New Zealand first in financial market development in its Global Competitive Report 2015-16. This ranking recognises that our financial markets can make capital available to private sector investment from sources such as bank loans and well-regulated securities exchanges in order to contribute to business investment, which is critical to broader economic productivity. The soundness of New Zealand’s banks continues to rank highly (fourth out of 140 countries), and New Zealand leads the world in terms of trustworthiness and confidence in the banking sector – an enviable reputation. The strength of our banks means they can access funding at good rates, and the benefits of this can be passed onto New Zealanders.

Managing risk with a long term view

Since the GFC there has been a renewed focus on ensuring risks are minimised within our banking industry. Our banks invest significantly in best practice governance, risk management, portfolio management, business continuity planning and infrastructure. Ongoing investment in technology and cybersecurity helps ensure our bank systems and customers are well-protected against potential threats of cybercrime. This long term view and investment is also a commitment to maintaining a sustainable and successful banking sector in New Zealand.
Banks understand the importance of long term thinking and are focused on striking the right balance between lending and growth on the one hand, and prudence on the other. For many New Zealanders this presents the opportunity to save for a more secure future through personal saving and investment in KiwiSaver, with banks being able to offer a range of investment options, competitive fees and investment capability.

Playing our part for a stable economy

New Zealand’s regulated banking system supports a flexible economy and is respected globally. Its effectiveness is contributed to by government and the banking sector working in a coordinated and consultative way to achieve a balance of policy and prudence through quality regulation. The banking sector is committed to working constructively with government and regulators to help ensure the best outcomes can be achieved. As an industry we are very focused on playing our part toward maintaining a stable banking environment.
The challenges that banks have faced following the GFC have not been insignificant. The wholesale funding markets remain volatile and there have been numerous legislative and regulatory changes. Our banks are committed to complying with their domestic and international obligations as registered banks. Doing so has required substantial investment and resources to be expended on implementing these changes, which have included the Anti-Money Laundering and Countering Financing of Terrorism Act 2009, United States Foreign Account Tax Compliance Act (FATCA), and the Reserve Bank of New Zealand’s requirements for banks to hold increased capital and restrictions on loan-to-value ratios.

A key benefit of a stable banking environment is that banks can continue to invest in New Zealand.

In 2015, banks directly contributed $6.9 billion to the New Zealand economy. That’s made up of the $4.9 billion cost of running their businesses here, which includes employing around 25,000 people and purchasing goods and services from businesses across New Zealand. In addition to that operational expenditure, banks paid $2 billion in tax.

A stable banking sector contributes to a stable and sustainable economy. On a personal level banks allow us to finance our homes, buy products, and grow our savings. They also support domestic businesses and export businesses to grow.

Banks thinking global, acting local

At a local level the banking sector recognises it’s as much as working with customers as it is working for customers. Managing relationships is very much a part of managing risk. Contributing to and building relationships with communities and customers is important.
It is critical for banks to understand their customers’ industries to assist with responding effectively to their needs and issues. Some industries are more vulnerable to fluctuations than others. This means banks focus on continuing close working relationships with their customers. For example, in recognising the importance of agribusiness to the economy, banks are committed to supporting and working with farmers during the good times and bad times.
Banks are an essential part of local communities. This is evident through being a significant employer, purchasing a range of local goods and services, and playing an active role in communities through sponsorship and volunteer projects.
Our banks have weathered the last few years of global financial turmoil well. They are among the best capitalised and reputed banks in the world – that’s good for us and the economy. This also means our banks are well placed to meet the global and local challenges ahead.
A stable and resilient banking system helps underpin a resilient economy. Mitigating and managing risk to maintain its resilience is a banking sector responsibility, one that is not taken lightly.