New Zealand’s four largest banks remained above minimum capital requirements in a severe trans-Tasman stress test, although their aggregate common equity tier one ratio fell 4.7 percentage points to 8.5%. The low point occurred in 2029, the third year of the hypothetical scenario, before management actions were included. The Reserve Bank of New Zealand and Australia’s prudential regulator completed the first joint exercise of its kind since 2017.
The test covered ANZ Bank New Zealand, ASB Bank, BNZ and Westpac New Zealand, which together account for 84% of lending in the country. Its scenario combined severe recessions, peak New Zealand unemployment of 10.5%, a 35% fall in house prices, a three-notch ratings downgrade, disrupted market funding and an offshore cyber incident. Regulators said the scenario was deliberately more severe than their expected outlook.
LOAN LOSSES DRAIN CAPITAL
Aggregate impairment expenses reached NZ$6.2 billion in the first stress year and NZ$7.2 billion in the second, compared with a NZ$0.3 billion annual baseline. The losses were the main reason capital ratios declined as more households and businesses became unable to repay loans. Even under that pressure, the banks continued lending throughout the simulated downturn.
The 8.5% stressed ratio remained above New Zealand’s 4.5% regulatory minimum, but it materially depleted capital buffers designed for periods of stress. Banks proposed cost reductions, repricing, credit measures, capital issuance and possible injections from Australian parents. The exercise did not allow subsidiaries to assume that parent support would be available when both countries were under simultaneous pressure.
CROSS-BORDER SUPPORT REMAINS UNCERTAIN
The test highlighted how linked parent and subsidiary credit ratings could raise funding costs and restrict access to capital during a downgrade. It also found that cyber incidents and property-market weakness could transmit stress across the Tasman. Regulators said the exercise improved their view of recovery actions and parent-subsidiary interdependencies.
The RBNZ will develop recommendations for participating banks, while APRA plans to publish detailed Australian findings later in 2026 after engaging with lenders. Future supervision will examine whether capital and crisis-management plans make cross-border support sufficiently reliable. The regulators are also considering more regular joint stress tests.