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RBNZ sees heightened risks to New Zealand's financial stability

FXstreet.com (Barcelona) - Developments in private sector credit and the residential property market over the past year point to increasing risks to financial stability in New Zealand, warned Graeme Wheeler, Governor of the Reserve Bank of New Zealand on the bank's six months Financial Stability Report just released.

"House prices are rising rapidly in Auckland and Canterbury, household credit growth has increased and there are signs that the rebuilding in household savings is beginning to stall. Household debt is rising from a level that is high relative to disposable income and house prices already appear overvalued on a number of measures, increasing the risks to both borrowers and the financial system that could arise from adverse economic conditions" RBNZ Governor Graeme Wheeler said.

"Further price escalation will worsen the potential damage that could result from a housing downturn following an economic or financial shock," Wheeler added.

On the high exchange rate, Wheeler said: "New Zealand’s elevated exchange rate is also continuing to hinder a rebalancing of domestic activity towards the tradables sector, which would assist in reducing external vulnerabilities."

Meanwhile, the RBNZ said banks in New Zealand continue to show strong balance sheets, with capital levels meeting the latest Basel III requirements. The four largest banks in New Zealand remain rated AA-' with stable outlook.

Wheeler continues to warn: "Despite the higher capital buffers in banks, rising house prices are creating risks for the New Zealand financial system, by increasing both the probability and potential impact on bank balance sheets of a significant house price adjustment. The greater willingness of banks to approve high loan-to-value ratio (LVR) mortgages has further increased the potential adverse impact of a fall in house prices."

In order to put precautionary mechanisms in place, the Reserve Bank has been reviewing whether bank capital requirements for housing loans properly reflect risk in the sector.

"Following stage one of this review, the Reserve Bank is increasing the amount of regulatory capital required for high-LVR housing loans. This will strengthen the capacity of the banking system to weather a housing downturn, and should also lead the banks to review the riskiness of the loans they are currently writing" Wheeler added.

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