. high levels and concentrations of debt the majority of bank lending is to the household sector – at 58 percent – and secured against housing assets. household sector indebtedness represents the new zealand financial system ’ s single largest vulnerability. 9 the insurance sector has around $ 70 billion in total assets, equivalent to 25 percent of gdp. the unlicensed sector is made up of the government - owned accident compensation corporation ( acc ), the earthquake commission ( eqc ) and the southern response earthquake services – a government owned insurer resulting from the government bail - out of ami following the canterbury earthquakes – as well as some small private insurers. nzx ’ s market capitalisation is around $ 135 billion, while the total value of the domestic bond market is around $ 131 billion ( excluding government debt ). the fund management sector has around $ 125 billion of assets ( both domestic and offshore ) under management. the non - bank lending institutions ( nbli ) sector provides around a third of consumer lending to new zealanders but it remains small relative to the rest of the financial system. mortgage lending from nbli is around 3 percent of the total across the financial system. of the nbli, 25 are licensed non - bank deposit takers ( nbdts ) – financial firms that accept deposits but are not registered banks – with total assets worth $ 2. 5 billion. other lenders that do not take deposits, and therefore are neither banks nor nbdts, have total assets of $ 9. 7 billion. the reserve bank operates the exchange settlement account system ( esas ), which settles all interbank payments, and nzclear, which settles trades of securities. two thirds of systemic banking crises around the world have been preceded by a housing boom and bust. 10 highly indebted households are vulnerable to shocks, such as higher interest rates or unemployment, that reduce their debt servicing capacity. this can lead to households cutting their consumption, selling their house or, if the shock is severe enough, defaulting on their loans. household indebtedness has increased dramatically in new zealand in the last 30 years. in 1988, the average household owed around $ 16, 000 in debt and had an income of around $ 35, 000 – a debt - to - income ratio of 46 percent. by the end of 2017, this ratio had risen to 168 percent, following a ten - fold increase in average household debt to nearly $ 160, 000, while average incomes had only

systemic and through - the - cycle view of prudential regulation. this reduces the risk of spillover from the financial sector to the real economy. soundness is not easily translated into a single, quantifiable benchmark against which performance can be monitored. the academic literature and various countries ’ prudential reforms since the gfc suggest there is a wide range of views on the optimal quantity and quality of capital for a banking system. indeed, the literature generally suggests that ‘ optimal ’ capital is not only higher than regulatory minimums, but can also span quite a wide range. the literature is therefore helpful in pointing to the direction that regulatory capital should travel, but not the destination. we are naturally cautious in how we think about risk to the banking sector. we operate in the uncertain : the origin of the next crisis is unknown. and as alluded to earlier, a banking crisis would have significant costs for ordinary new zealanders that would persist for years, in terms of economic output, public debt, employment and welfare. there is a good argument that there are soundness and efficiency gains to be made by requiring banks to hold more capital – within reason. more capital would help deliver both greater certainty, and higher expected output ( before and after a crisis ). this is illustrated by figure 5, where the level of financial stability is measured on the x axis and the expected output is measured on the y axis. at some point more certainty comes at a cost, though this may be justifiable if we desire greater certainty. however based on the literature and the views of other regulators it would seem that we are a long way from that trade off. some will argue that certainty comes at a price – that share capital is a more expensive form of funding than debt. there is a debate as to how high that price really is. and we need to weigh those private costs against the social costs of a crisis. figure 5 a framework for thinking about our policy goal output financial stability low high the question remains, how much certainty do we want, how risky do we want our financial system to be in the long - term? goldilocks returns with the same question what level of financial stability is too risky, too safe, or just right? to answer this we need to think about our risk tolerance for crises. stress tests one input into informing the reserve bank ’ s risk tolerance is stress testing. we ask banks to consider what would happen in the event of a severe but plausible hypothetical scenario