The unfavorable economic developments abroad posed serious risks to New Zealand's financial system, the Reserve Bank of New Zealand said in the latest edition of its Financial Stability Report, published Wednesday.

"External environment poses significant risks for the New Zealand financial system," the central bank said.

RBNZ said the slowdown in emerging markets, particularly in China, fragile conditions in euro area and the prospect of a material tightening in US fiscal policy were the main downside risks for the global economy as well as for New Zealand's financial stability.

However, financial market sentiment has improved since the last report, partly reflecting further monetary easing around the globe and various measures to help manage the crisis in the euro area.

This uplift in sentiment, in turn, has improved major New Zealand banks' access to global funding markets and has contributed to upward pressure on the New Zealand dollar, the report pointed out.

Releasing the report, RBNZ Governor Graeme Wheeler said New Zealand's financial system has strengthened, despite a challenging international environment.

The report found that the banks are well-positioned to cope with future periods of financial market volatility or a slowdown in economic growth.

It also observed that in the recent years, New Zealand's financial system has reduced its overall reliance on external funding due to the recovery in private savings. In contrast, the public sector's net external liabilities have increased given recent fiscal deficits.

The central bank said public sector should continue to reduce the fiscal deficit and that the private sector need to continue strengthening its balance sheets to reduce the economy's vulnerability to external economic and financial shocks.

RTTNews