The Reserve Bank of New Zealand (RBNZ) has recently published the results of the 2025 Bank Industry Stress Test, which assessed the resilience of the country’s five largest banks to two severe but plausible scenarios involving geopolitical risks.
The first scenario models the impact of a recession caused by a breakdown in trade, disruptions to global supply chains, and heightened geopolitical instability.
The scenario caused a notable decline in bank capital ratios. Although capital levels stayed above the minimum regulatory requirements, it would require considerable time and substantial measures to bring them back to the current standing.
In the second scenario, each bank experiences a cyberattack that causes a substantial outflow of retail deposits to rival banks and the closure of access to wholesale funding markets for the impacted bank over a three-month period, all occurring amidst the recession outlined in Scenario 1.
Bank capital declined further but stayed above the regulatory minimums. The liquidity reserves held by banks were adequate to cover the cash outflows.
However, their liquidity ratios decreased substantially, with some banks needing to take corrective measures to stay above the regulatory minimums. The recovery process extends longer under the additional liquidity stress, putting banks at a disadvantage relative to their peers. The results provide valuable insights for banks to evaluate their readiness for managing a combined stress on both their solvency and liquidity, a new aspect introduced in this year’s stress test.
In Scenario 2, the Reserve Bank’s overnight borrowing facility plays a crucial role in managing a sudden liquidity shock and maintaining stability within the financial system. However, since this is not a committed facility, banks may prefer to diversify their funding sources, especially in situations where other financial institutions are not experiencing liquidity stress.
“Recent developments in global trade policies have heightened the importance of evaluating banks’ resilience to geopolitical shocks,” said Director of Financial System Assessment, Kerry Watt.
“The exercise provides valuable insights for both participating institutions, the Reserve Bank and the wider financial system, helping to build our capability and preparedness to manage complex risks.”