New Zealand banks are, through the extension of housing loans, potentially vulnerable to fluctuations in household income, interest rates, and the level of household debt. With the economy's strong performance over recent years, there has not been stress due to these factors on the ability of households to service their mortgages, hence the experience of default on housing loans has been minimal.
However, as noted earlier, the focus of capital adequacy is not on favourable or benign economic conditions, or on the "expected" losses that occur as a normal part of banking business those matters should be addressed through provisioning. Rather, the focus is on unexpected loss associated with severe downturns in the economy's performance.