New Zealand's banking sector is well placed to cope with a major economic downturn caused by high inflation and low or negative growth, the Reserve Bank (RBNZ) says.

The central bank has just released the results of its annual "stress test" of banks in abnormal economic conditions.

RBNZ Deputy Governor Christian Hawkesby said the banks were tested against a stagflation scenario, including falls in house prices, a rise in unemployment, high interest rates and sliding share markets.

"Although banks' capital buffers would be reduced in such a scenario, they would still remain well above our regulatory minimum, thanks in part to the build-up of capital since the 2008 Global Financial Crisis, enabling them to continue to support

their customers and the economy," Hawkesby said.

The tests were designed to assess how banks cope with severe but plausible scenarios, even if they were not the most likely, and looked at bank capital but did not cover what might occur if there was a rush to withdraw money from banks.

The scenario was based on house prices falling a total of 47 percent from their peak last November, with share prices down 38 percent, unemployment hitting 9.3 percent, the official cash rate hitting 5.5 percent, mortgages above 8 percent, and

the economy contracting by 5 percent.

For good measure the test also threw in a major cyber risk event.

Looking over a four-year period, bank capital fell 3.3 percentage points to a minimum of 8.9 percent in the testing, compared to the 4.5 percent minimum required under banking rules.

"This would be a challenging macroeconomics environment for households and businesses with a large number of bank customers unable to repay their loans and experiencing large declines in wealth," the report said.

In that scenario banks would be hit by impairment expenses of $20.8 billion over the four years, compared to the $1.7 billion real cost of the Covid-19 pandemic over the past four years. They would also fall into losses in the second year of the

crisis.

"The combination of negative economic growth, rising interest rates and increasing unemployment lead to high levels of defaults, whilst falling asset prices reduce the collateral banks' hold to minimise losses in the event of a default."

The RBNZ releases its six monthly financial stability report on Wednesday, although Governor Adrian Orr said last week the financial system was in good shape.

ANZ Bank's $2.3 billion annual profit released last week was criticised as excessive, prompting suggestions of a windfall tax or other moves to curb earnings of big corporates.