High debt levels and a sluggish global economy will continue to weigh on the health of New Zealand's financial system, despite it being in better shape.
Reserve Bank Governor Graeme Wheeler. Photo: RNZ
In its second bi-annual review, the Reserve Bank notes market sentiment has improved since its last report in May, with pressures in global funding markets easing after efforts by authorities in Europe, the US and Japan to support their economies.
In New Zealand, Reserve Bank Governor Graeme Wheeler says the economy is growing modestly, while banks have strengthened their financial position and found it easier to raise money overseas.
Firms and households continue to slowly reduce high debt levels, but Mr Wheeler says the amount owed to foreigners - about 73% of gross domestic product - means the country remains vulnerable to any large economic shock.
"New Zealand banks have much better access to the global funding markets, New Zealand households and firms continue to reduce their reliance on debt - but household debt levels remain high overall. Borrowers are vulnerable to a potential fall in house prices," he said.
Mr Wheeler highlighted the high levels and concentration of dairy farm debt, with half the 30 billion of debt in the sector held by just 10% of the most indebted.
Banks have targeted growth in the agricultural sector, and deputy governor Grant Spencer says the banks should be mindful that a sharp fall in prices would hit the dairy sector hard.
Mr Spencer says some sectors, such as small and medium-sized firms, may be missing out.
He says credit conditions have eased, but for smaller businesses it's still relatively more difficult.
Mr Spencer says the Reserve Bank does not decide who should get loans and in the end the banks and borrowers have to make that deal themselves.
The four major Australian-owned banks made combined profits of $3.5 billion this year, which some argue are excessive, but Mr Wheeler says he doesn't think the banks' returns are outrageous given the risks they take.
