PHOTO: Reserve Bank Governor Adrian Orr has released the May Financial Stability Report. Photo credit: File.
Banks are in a solid position to weather the impacts of COVID-19, a Reserve Bank report shows.
In a Financial Stability report released on Wednesday, the Reserve Bank said that ‘stress tests’ were used to illustrate the banks’ resilience to withstand a broad range of adverse scenarios. If the economic downturn is prolonged, they would be able to keep lending.
The report acknowledges that households and businesses will face a significant drop in income, particularly those in tourism, accommodation and hospitality. As household incomes come under pressure and wage subsidies come to an end, the number of loan defaults is expected to rise.
“Loss of income will mean that some borrowers have difficulty repaying their loans. As a result, banks are likely to experience more loan defaults and losses,” the report said.
Under a scenario of a larger increase in unemployment and slower recovery than in its May Monetary Policy Statement, the Reserve Bank said that modelling suggests banks are likely to maintain capital ratios above minimum requirements.
“While there remains considerable uncertainty about the economic outlook, stress tests suggest that banks can withstand a broad range of adverse economic scenarios while retaining sufficient capital to continue lending,” the report states.
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