New Zealand banks have relatively little interest rate risk, said the Reserve Bank of New Zealand, ahead of its Financial Stability report to be released on Wednesday.
“They manage this risk by matching the repricing profile of their assets and liabilities, and by using financial products to hedge any differences. They are also required to hold sufficient capital to cover potential losses arising from any remaining interest rate risk, which incentivises banks to carefully manage the risk,” the central bank wrote in a preview.
The RBNZ said it was an important point to make, as the failure of Silicon Valley Bank highlighted how quickly concerns over risk management can undermine depositor confidence in an entity and the banking system as a whole. “This can potentially lead to increased deposit outflows, and in extreme scenarios, can contribute to a bank run,” the RBNZ warned.
The central bank said after the 2008 global financial crisis it expanded prudential requirements to address capital and liquidity risk by requiring NZ banks to have robust frameworks for managing interest rate risk. They are also required to value their liquid assets at market price instead of book value.
New Zealand banks’ lending is generally at variable or short-term fixed interest rates, which means the potential losses for banks from interest rate movements are smaller, it noted. The country’s banks, it said, also hold fewer bond assets than those in other developed economies, and these bonds are accounted for at fair market value.