The International Monetary Fund (IMF) has given New Zealand's economy an up-front tick of approval, but a pall hangs over the system from burgeoning debt exposure of both dairying and the housing market and from the country's reliance on offshore funding.
For households, the IMF has ratcheted up the pressure for the Reserve Bank to consider taking its loan to value ratio (LVR) restrictions a step further, and introduce debt-to-income limits on household borrowing.
That scenario could heap further pressure on first-home buyers already struggling to save the required deposits in the still heated property market.
The IMF's 90-page ''financial system stability assessment'' starts off highlighting ''key macrofinancial vulnerabilities'' with imbalances in the housing market, banks' concentrated exposure to the dairy sector and their high reliance on wholesale offshore funding.
''The banking sector has significant exposures to real estate and agriculture, is relatively dependent on foreign funding and is dominated by four Australian subsidiaries,'' the report said.
Adverse effects on the system could come from a sharp decline in real estate, a reversal of the recent recovery in dairy prices, a deterioration in global economic conditions or tightening in financial markets, the IMF said.
''Despite these vulnerabilities, the banking system is resilient to severe shocks,'' the report said.
The results from stress tests and analysis across all relevant risk factors indicate the solvency and liquidity of the banking system can withstand adverse and severe shocks.
However, the IMF said those tests had to be interpreted with caution and the authorities could strengthen the financial sector oversight and crisis preparedness to further improve the resilience of the system.
In a separate section on housing, the IMF noted real estate loans represented more than half of the banks' assets and it was not possible to yet assess the full effects on the housing market of the Reserve Bank's latest LVRs, from last October.
''If the measures do not substantially reduce current risks, as the recent experience with LVR measures seems to suggest, authorities should complement the current measures with debt-to-income (DTI) limits,'' the IMF said.
''Adding a debt-to-income cap to the [Reserve Bank's] macroprudential toolkit would enhance systemic resilience by limiting the risks from growing household indebtedness,'' the IMF said.
The IMF said the Reserve Bank and Ministry of Finance were in discussions over introduction of DTI limits in the macroprudential toolkit.
Minister of Finance Steven Joyce said he was pleased the IMF had recognised the significant progress New Zealand had made in developing its regulatory system since its last report in 2003-04, including introduction of a prudential regime for the insurance sector, creation of the Financial Markets Authority (FMA) and the introduction of the Financial Markets Conduct Act 2013.
He said the Reserve Bank and other agencies had significant work in progress on a number of matters the IMF raised.
That included the proposed debt to income lending ratios, the Reserve Bank's current review of bank capital requirements, its review of the Insurance (Prudential Supervision) Act and the Ministry of Business, Innovation and Employment's review of the Financial Advisors Act, Mr Joyce said in a statement.
The IMF recommended the introduction of deposit insurance as ''the best option'' to strengthen the Reserve Bank's crisis resolution framework.
Green Party co-leader James Shaw said National should follow the IMF advice and implement deposit insurance to protect New Zealanders' savings.
''New Zealand is the only developed country in the world where we can lose our savings if our bank makes a bad decision, and that's because we don't have deposit insurance,'' Mr Shaw said in a statement.
For $5 to $10 a year, people with savings could have peace of mind their money would not be used to prop up a failing bank; noting Americans and Australians were protected by deposit insurance on savings up to $250,000 and those in Canada and the EU were protected up to $100,000.
''We think that [$100,000] would be an appropriate level for New Zealand,'' Mr Shaw said.
The Reserve Bank and Financial Markets Authority were both considering the IMF's findings and recommendations from its report.
The Reserve Bank said the IMF recommendations for improvements included increasing the intensity of supervision for both the banking and insurance sectors, within the Reserve Bank's ''three-pillar'' approach to prudential regulation, which was based on self, market and regulatory discipline.
The Financial Markets Authority chief executive Rob Everett said the IMF's previous 2003-04 report had identified a number of material deficiencies in New Zealand's framework for securities regulation.
He said the IMF now noted that securities regulation in New Zealand had undergone a ''major overhaul'' given the FMA's establishment and the introduction of the Financial Markets Conduct Act 2013.
''The FMA now has a much broader mandate than the previous regime under the Securities Commission, including the licensing or supervision of a number of new sectors,'' Mr Everett said.
