3. Financial Services—StabilityTODD MULLER (National—Bay of Plenty) to the Minister of FinanceFinancial Services—Stability3. TODD MULLER (National—Bay of Plenty) to the Minister of Finance: What reports has he received showing New Zealand's economy is strong and its financial system is sound and operating effectively?Hon BILL ENGLISH (Minister of Finance): Yesterday the Reserve Bank released its November Financial Stability Report. The Reserve Bank says the economy is strong in comparison with other advanced economies and New Zealand's external liabilities are well below pre - global financial crisis levels. It says the financial system is sound with the banking system holding capital and liquidity buffers above regulatory requirements.Todd Muller: What are some of the main financial system risks that the Reserve Bank points to in its report? Hon BILL ENGLISH: We need to keep in mind the context in which the Reserve Bank is pointing out these risks. It has fundamental responsibility for the financial stability in the economy and tends to point out anything that looks like it could be a risk so these should not be interpreted as significant risks right now to the financial system. It highlights risks it has talked about previously: the housing market bank funding pressures and dairy sector indebtedness—for instance in the case of the dairy sector rising prices are taking some pressure off the small number of heavily indebted dairy farmers. The bank says that measures that it has taken in the housing market have had some effect but it stresses that addressing the underlying housing supply imbalances will be necessary to contain price growth.Todd Muller: What steps can he report are being taken to improve financial sector resilience?Hon BILL ENGLISH: Some improvements can be made at the margins but the New Zealand financial sector particularly given the global financial crisis is already substantially resilient. Since then there has been a significant uplift in the prudential requirements on banks for instance and the savings rates of New Zealanders have also increased since then. A number of steps though have been taken to improve resilience: the loan-to-value ratio rules were recently tightened by the Reserve Bank the capital requirements for housing investors requiring 40 percent deposit and the bank is now reviewing the capital buffer requirements on banks.James Shaw: How does the Minister account for the discrepancy between his own and Treasury's highly optimistic assessment of the economy against the Reserve Bank's assessment which talks about considerable continued build-up of risk in particular in the dairy and housing markets?Hon BILL ENGLISH: I do not think there is a fundamental difference in the views of agencies or the Government or even the general public actually about where the economy is heading. It is on a positive track. It is one of the faster-growing economies in the developed world delivering more jobs and moderate but consistent increases in incomes. The Reserve Bank has a particular role which is to look at anything that could turn into a risk to the financial system. It goes into that in great detail in its financial stability report but it does not contradict the outlook for the economy.Todd Muller: How does New Zealand's banking system compare with those in other advanced economies?Hon BILL ENGLISH: There are a number of ways in which the banking system is performing well. The cost of bank services is below the OECD average. New Zealand has the lowest share of non-performing loans in the OECD at 0.4 percent—so only 0.4 percent of loans are in a state where the borrower is not meeting their obligations. Across most developed countries in the OECD the median is around 4 percent. The Reserve Bank also ranks New Zealand's banks as highly cost-effective with the lowest expenses as a proportion of income in the OECD.