By Stephen Wright 



  WELLINGTON, New Zealand--The resilience of New Zealand's banks will be tested by the coronavirus pandemic, but the overall financial system is in a solid position to weather the economic downturn, the central bank said on Wednesday. 


  Loan losses for banks will rise, but stress tests indicate they can maintain adequate capital even if the economic downturn is worse than current projections, the Reserve Bank of New Zealand said in its twice-a-year review of financial stability. 


  "At the outset of the pandemic the banking system had significant capital and liquidity buffers, built up due to both regulatory requirements and several years of favourable banking conditions," RBNZ said. "These buffers can now be used to support their customers' long-term economic future." 


  New Zealand's banking industry is largely owned by Australia's four main trading banks. 


  The banks would be able to maintain capital above minimum required levels in a scenario where house prices fall 36%, unemployment peaks at 13.5% and economic recovery to pre-pandemic levels takes until June 2023, according to RBNZ's stress tests. 


   Under the central bank's "very severe scenario" that includes unemployment of nearly 18%, banks would need to raise capital from shareholders, preliminary results of the stress tests show. 


  The central bank said that some insurers and non-bank deposit takers entered the downturn in a vulnerable position of low profitability and limited capacity to absorb shocks. 


  RBNZ said it expects consolidation to continue among deposit-taking institutions such as finance companies and credit unions, who together make up 0.6% of total deposits in New Zealand's financial system. 


  It said it is working with weaker insurers to improve their resilience. 


  Write to Stephen Wright at stephen.wright@wsj.com