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A new IMF paper on New Zealand’s financial system finds that, given the conservative approach in implementing the Basel II framework, the banks’ headline capital ratios underestimate their capital strength.
Stress tests in the paper by IMF economists show that four major banks could withstand sizable standalone shocks to their exposure to either residential mortgages (calibrated on the Irish crisis experience) or corporate lending.
However, combined shocks to both residential mortgages and corporate lending would put more pressure on the banks’ capital.
Given high bank concentration and large offshore wholesale funding needs, the paper says the merits of higher minimum capital requirements could be considered along with other measures.
The banks need to be assessed on an ongoing basis to "minimise the risk" they would pose to the economy if they were to fail, the paper says.
"Given their size, they are perceived as too big to fail."
The main concerns are the banks' large exposure to "highly indebted households and the agricultural sector" along with the reliance on offshore borrowing and house prices that look overvalued.