Banks are again in the firing line as the Reserve Bank releases its 2009 Financial Stability Report, which shows New Zealand banks made a pre-tax profit of $4.5 billion last year, down seven percent on a year earlier.

However the losses are being offset by banks increasing their margins on loans, which the Reserve Bank hopes will not expand to chase profits.

Reserve Bank Deputy Governor Grant Spencer is accusing banks of being slow to reduce interest rates after the official cash rate was dropped to 2.5 percent. Mr Spencer says a couple of banks reduced fixed rates but not floating rates and he says the Reserve Bank was disappointed with their response.

The report warns that New Zealand continues to be impacted by the global financial crisis, despite the recent pick-up in equity markets.

"Major government interventions have eased stresses in the international credit markets, but the adverse second-round effects of the financial crisis on global economic activity and commodity prices will take some time to play out."

Mr Spencer says the global pressures are encouraging a recovery in household savings which should contribute to an improvement in New Zealand's external balance over the next few years.

"The banking system has continued to lend to households and businesses over the past year, but credit growth has slowed in recent months, lending criteria have tightened and some businesses are reporting difficulties in obtaining credit. While current conditions warrant caution, it is important that the banks continue to lend to creditworthy borrowers."

Mr Spencer says New Zealand has been fortunate that its banking system has not experienced the distress seen in some countries. However, while the overall asset quality of the banks remains strong, impaired assets have increased sharply since late last year.

"Provisioning is expected to rise further over the year ahead as business profits weaken and unemployment rises. Banks must ensure that they make adequate provisions and maintain capital levels sufficient to absorb further unexpected losses."