Dean Jacqui: Oral Questions — Questions to MinistersText is incorporated into the Bound VolumeDean Jacqui: Oral Questions — Questions to Ministers[Sitting date: 11 May 2016. Volume:713;Page:10963. Text is incorporated into the Bound Volume.]1.JACQUI DEAN (National—Waitaki) to the Minister of Finance: What reports has he received on the resilience of the New Zealand financial system?Hon BILL ENGLISH (Minister of Finance):Earlier today the Reserve Bank issued its Financial Stability Report. It says that the New Zealand financial system remains resilient and continues to perform its functions effectively. Risks to the financialstability outlook have increased in the last 6 months as theglobal economic outlook has deteriorated. However financial systems resilience remains high with capital ratios in our banks nearing recenthighs and funding and liquidity buffers all exceeding required minimums.Jacqui Dean: Whatare some of the risks to the outlook for financial stability identified by the Reserve Bank?Hon BILL ENGLISH: The Reserve Bank points to the soft global growth and the momentum in commodity production is contributing to weaker prices particularly for dairy products which have stayed lower for longer. Growth in China continues to slow although the bank says that New Zealand will benefit from China’s reorientation towards consumption-led growth. The bank also says that housing constraints especially in Auckland are contributing to financial stability risks. Among other measures the bank recommends improving supply by reducing impedimentsto densification and greenfield development and addressing infrastructure constraints. It is worth noting that each of these risks should they be realised could possibly happen together rather than in isolation with more serious consequences.Jacqui Dean: What were the results of stress testing by the Reserve Bank on financial institutions in the dairy and banking sectors?Hon BILL ENGLISH: A stress test is when the Reserve Bank models the effect of severe economic downturns—for instance a scenario with a 6 percent fall in GDP unemployment rising to 13 percent and residential property prices falling 40 percent. Despite modelling this series of severe shocks banks remain sound. The bank also conducted stress tests on the five largest dairy lenders and found that although there would be a significant effect on loans written off losses would be manageable for the banking system as a whole if dairy payouts stayed low until 2020. Although the results of the stress tests are positive I would point out that under these scenarios there would be ongoing negative effects on the economy even if the banking system were able to absorb the pressure.Jacqui Dean: What is the Reserve Bank’s view on how New Zealand’s improved external balances since 2008 are helping to reduce financial system risks?Hon BILL ENGLISH: Although the growth in house lending and low dairy prices have been increasing risks to the system the Reserve Bank says that New Zealand’s current account deficit currently at 3.1 percent of GDP is well below levels seen prior to the global financial crisis. It notes that our net external debt has fallen from 83 percent of GDP at the end of 2008 to 57 percent a significant drop. The bank says the composition of external liabilities has become more stable and lower global interest rates have improved New Zealand’s ability to repay external liabilities.David Seymour: What role does foreign investment in the banking sector play in the resilience of that sector?Hon BILL ENGLISH: Technically our four main banks are foreign owned and therefore run by foreign investment. When the pressure came on in 2008—it is hard to tell but it looks as if the Australian parent banks offered considerable support to their New Zealand banks. However it is good to see looking ahead that there is further diversification in the ownership of our banks with strong growth in New Zealand - owned banks and a wider range of offshore investors in our banking system.