"To date in New Zealand it has been the Government's balance sheet that had taken by far the biggest brunt of the Covid-19 economic shock.
"This will change. It is going to be household, business balance sheets that will need the support of the financial institutions."
Orr said Governments internationally could not continue to be the only backstop.
"This is why banks hold capital, this is why they do their business."
He said it was in banks' best interests to support businesses through the transition back into economic growth because that was their future revenue.
To date bank profitability had primarily being driven by residential property lending, Orr said.
"We are seeing some growth back in business lending but it is still below the level of pre-Covid and we are seeing it be very selective in areas of growth - not necessarily in areas that need ongoing support through this period."
Bank earnings have increased strongly over the past year and combined with restrictions on banks paying out dividends capital ratios have increased to high levels.
That meant banks were well placed to meet higher capital requirements which come into force from July next and absorb any impacts from the current alert level restrictions.
Orr said New Zealand's economic activity had bounced back to above pre-pandemic level although the latest delta outbreak was creating stresses for some industries and regions - particularly in Auckland.
To date, banks had received only a small rise in applications for assistance from customers and no major issues had been reported in terms of financial market liquidity.
However, the Reserve Bank report noted that it remained mindful that the number of firms in stress may rise as cash buffers were depleted over the coming months.
It also warned that the transition to Covid being endemic in New Zealand created financial stability risks.
"While restrictions may ease as vaccination rates increase, living with Covid-19 in the community could lead to changes in consumers' preferences and behaviour.
"Businesses will need to adapt, and some businesses that have stayed afloat to date may not be viable as support schemes wind down. These changes could drag on economic activity."
And the report noted that economic uncertainty was likely to remain for some time.
"The outlook for inflation and activity is uncertain, given the novel nature of this shock, and the risk of further variants developing or a return to tighter restrictions."
It also warned that higher interest rates could be a headwind for assets prices both globally and in New Zealand.
In the medium-term structural changes to office demand and retailing models could bring stresses to parts of the commercial property sector.
"Vacancy rates have only risen modestly to date, but this may accelerate as current tenancies come up for reassessment, particularly for less attractive sites."
Strong demand for housing had pushed up prices while supply disruptions were also increasing the cost of building.
"While in aggregate the household sector has endured the pandemic quite well, the level and trajectory of house prices is unsustainable and this is creating risks for recent buyers.
"The contribution of population growth to demand for housing has declined
significantly since the outbreak of Covid-19 last year. Meanwhile, house building has
been at record high levels and there is significantly more in the pipeline."
The report noted that property investor activity had been subdued since the tightening of the loan to value ratios for investors in March and May and the tax changes.
Recent property buyers were needing to borrow more and were increasingly vulnerable to future shocks.
On Monday the Reserve Bank further tightened bank lending restrictions to owner-occupiers and it will soon consult on debt to income restrictions.
In the meantime, the central bank said it expected banks to be more cautious about high debt to income loans given the risks of rising interest rates.
BNZ last week introduced debt to income restrictions for new borrowers.
Deputy Governor Geoff Bascand said: "The unpredictable nature of future economic stresses reiterates the importance of resilience for our financial institutions so that they are in a strong position to keep supporting their customers and the economy."
The report also warned that heightened risks were emerging in property development, particularly for small and medium-scale residential projects.
"Labour, material supply, and logistical constraints are raising costs and pushing out completion timelines. Attractive sites for development continue to increase in price. Combined, these factors are eroding and adding risk to developer margins.
"Stresses amongst developers may emerge if these costs continue to increase or house prices decline."
With the risk of global inflation heightened, already stretched asset prices are facing headwinds from rising global interest rates."
