2022 Bank Solvency Stress Test: Assessing the resilience of banks to a stagflation scenario

Banking stress tests assess how banks can cope with severe but plausible scenarios. The scenarios modelled are not the most likely outcomes. We use the tests to look at banks’ resilience, making sure they have enough capital to withstand severe shocks while being able to continue supporting the economy. This stress test focused on bank capital and did not attempt to cover a liquidity stress such as a severe outflow of bank deposits. The 2022 Bank Solvency Stress Test consisted of a stagflation scenario that shares elements of the current economic environment. It featured a global slowdown in economic activity as central banks raise interest rates in the face of high inflation and the lingering impacts from the pandemic. The results of the stress test showed that the New Zealand banking sector is well placed to withstand a stagflation scenario of high inflation and low or negative economic growth. This resilience has been partly due to the build-up of capital since the Global Financial Crisis.