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Updated at 6:57 pm on 9 May 2012
The Reserve Bank says uncertainty about the commitment of some heavily-indebted European countries to implement tough austerity measures poses a risk to New Zealand's economy.
In the first of its twice-yearly Financial Stability Reports, the central bank says the soundness of the financial system continues to improve.
Reserve Bank Governor Alan Bollard said the sentiment on financial markets has improved since the beginning of the year.
However, the situation remains fragile given limited progress in addressing Europe's underlying issues.
Dr Bollard said the central bank does not have an independent view on what the weekend election results in France and Greece mean, but is more concerned about whether the outcomes could lead to any freezing up of bank funding markets in Europe.
"We have to recognise there could be periods of fragility like that."
Dr Bollard said many households have been saving more, business investment remains weak, while global growth is sluggish and commodity prices have eased.
The Reserve Bank said local banks are in a stronger position to deal with a fresh financial crisis than at the end of last year.
Lenders have boosted capital, are more profitable and have taken advantage of periods of calm on global markets to roll over existing funding for mortgages.
Dr Bollard said banks have been able to borrow a large part of the money needed this year for new lending and to pay back existing debt.
He said if global money markets do seize up again, the central bank is ready to lend to the banks as it did in 2009.
The Reserve Bank said higher bank profits have helped shore up local lenders' capital since the 2008 financial crisis, but it expects profits will come under pressure from more competition and ongoing weak lending growth.
Copyright © 2012, Radio New Zealand
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