Key Takeaways
- New Zealand's financial stability risks remain elevated due to ongoing global trade fragmentation and heightened uncertainty.
- Despite a volatile global economic environment, New Zealand's banks have significantly strengthened their resilience against multiple shocks, maintaining strong capital and liquidity buffers.
- Robust lending standards and loan-to-value (LVR) limits have effectively kept high-risk lending under control, contributing to the banking sector's stability.
- The Reserve Bank of New Zealand (RBNZ) will ease mortgage LVR restrictions from December 1, 2025, increasing flexibility for banks and improving credit access, particularly for first-home buyers.
The Reserve Bank of New Zealand (RBNZ) has warned that financial stability risks in the country remain elevated, primarily driven by global market volatility, trade fragmentation, and persistent uncertainty. This assessment comes from the RBNZ's latest Financial Stability Review, published on November 5, 2025. As a small, open economy, New Zealand remains particularly vulnerable to external impacts on global economic activity and financial market fluctuations.
Global Headwinds and Domestic Pressures
The RBNZ highlighted that fragmentation of global trade and finance, alongside ongoing uncertainty, continues to present significant risks. Elevated global equity valuations, particularly in tech stocks, and increasing government debt levels in many advanced economies are also identified as vulnerabilities. Geopolitical risks have escalated, intensifying market instability and posing a material threat to worldwide economic performance.
Domestically, economic activity remains subdued, with previously high interest rates, rising unemployment, and a weak housing market continuing to dampen demand. Loan defaults have seen an uptick, although they remain low compared to levels observed during the Global Financial Crisis. However, lower borrowing costs and strong agricultural export prices are providing some support for debt serviceability.
Resilient Banking Sector Amid Shocks
Despite these challenges, New Zealand's banking sector has demonstrated robust resilience. Banks have significantly strengthened their capital and liquidity buffers over the past decade, positioning them well to withstand a range of severe shocks. Recent stress tests conducted by the RBNZ confirmed that the country's five largest banks—ANZ New Zealand, Bank of New Zealand, ASB Bank, Kiwibank, and Westpac New Zealand—are well-placed to manage a severe economic downturn triggered by worsening geopolitical risks. These institutions collectively account for 91% of bank lending in New Zealand.
The RBNZ noted that these strong capital levels would allow banks to cope with a significant worsening of the economy while continuing to provide credit to support any recovery. The stress tests also included scenarios for IT failures and global economic downturns, reinforcing the sector's preparedness.
Easing LVRs and Maintaining Strong Lending Standards
The RBNZ also announced an easing of mortgage loan-to-value ratio (LVR) restrictions, effective December 1, 2025. This adjustment follows the successful introduction of debt-to-income (DTI) limits last year, which have bolstered borrower resilience and reduced the necessity for stringent LVR settings. Acting Assistant Governor for Financial Stability, Angus McGregor, stated that house prices are now within a sustainable range, mortgage growth is moderate, and the share of high-risk lending remains low, justifying the easing.
Under the new rules, the cap on owner-occupier lending with an LVR above 80% will increase to 25% from 20%. For property investors, the limit on lending with an LVR above 70% will double to 10% from 5%. Finance Minister Nicola Willis welcomed the move, asserting it would "make it easier for Kiwis to get a foot on the property ladder". DTI restrictions, however, will remain unchanged, continuing to limit high-risk lending during housing upswings and periods of low interest rates. The RBNZ's new Financial Policy Committee will oversee and review LVR and DTI settings at least annually.
Ed Liston is a senior contributing editor at TheStockMarketWatch.com. An active market watcher and investor, Ed guides an independent team of experienced analysts and writes for multiple stock trader publications.