New Zealand's banking system has coped relatively well with the stresses of the global financial crisis of the last year, but banks should prepare for higher bad debts by making extra provisions and keeping capital levels strong, the Reserve Bank said in its May Financial Stability Report. "The stability of New Zealand's financial system is being challenged by continuing strains in financial markets, the sharpest contraction in global economic activity in at least 30 years and an extended period of weakness in the domestic economy," the Reserve Bank said in its report. "Unlike many other developed countries, however, New Zealand has not experienced significant distress in its banking sector, nor has the availability of credit to households and businesses tightened to the same degree," it said. "Nevertheless, the current economic and financial environment presents significant challenges for the banking sector in New Zealand. Asset quality has deteriorated markedly, albeit from a very strong level, as unemployment rises and business profitability declines," it said. "Banks should ensure that they make adequate provisions and maintain capital levels sufficient to absorb unexpected losses. Exposures to the agricultural and commercial property sectors warrant particular attention."
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