Resilience as a
pathway to
Prosperity
A speech delivered to FSC24 Conference in Auckland
on 5 September 2024
By Christian Hawkesby, Deputy Governor/General
Manager Financial Stability
With special thanks to Chris Hunt, Patrick Carvalho and
Kerry Watt
Introduction
E nga mana, e nga reo. E nga karanga maha o te wa.
Tihei mauri ora!
(To all authorities, all voices, to the many chiefs gathered here. Behold the breath of life!)
E nga rangatira
Karanga mai
Mihi mai
Whakatau mai
Tena koutou katoa
(Thank you to the leadership of the Financial Services Council Conference who have called us here;
who have welcomed us here; who have looked after us here. Thank you very much)
I want to acknowledge the recent passing of The Māori King, Kiingi Tuheitia Pootatau Te
Wherowhero VII. Kiingi Tuheitia has been instrumental in advocating for Māori in uniting people
through kotahitanga and will be sorely missed. I also want to thank him for his collaboration with
Te Pūtea Matua on the history of Māori banking. I send my aroha to his whānau during this time.
It is a pleasure to speak to you today at the annual Financial Services Council Conference.
This is my third time joining you since becoming Deputy Governor and General Manager of
Financial Stability. Thank you for continuing to invite me back! It is always a pleasure to discuss
with you what's next for the Reserve Bank of New Zealand, Te Pūtea Matua.
The theme of this year's conference is Consumer Resilience and Prosperity.
Today I'd like to pick up this theme by discussing the role of the Reserve Bank as a central bank
and prudential regulator, and how we think about financial stability.
In particular, I'll talk about three things.

First, how we focus on the resilience of the financial system as a pathway to enabling a
productive and sustainable economy, and ultimately prosperity and wellbeing.

Second, how we do this while also having regard to other important enabling features of the
financial system, including competition, innovation, efficiency and inclusion.
 Third, how this all comes together in our Strategic Themes, mirroring those of the Council of
Financial Regulators (CoFR)1.
We do this all in the context of being part of the international financial system, where trust and
confidence is built by following international best practice as a modern prudential regulator.2
The rationale of public policy in the financial system
Central banks have been in the business of financial stability for centuries.
Maintaining financial stability was one of the key motivations for the establishment of the Riksbank
in Sweden as the first central bank in 1642, and the Bank of England shortly after. At the Reserve
Bank of New Zealand, we've been in the business of financial stability since we were founded 90
years ago, and more formally as a prudential regulator since the 1980s.
It is important to step back and briefly remind ourselves why a public policy institution, such as Te
Pūtea Matua, is tasked with the responsibility for ensuring financial stability. The role of the
financial system is to enable saving and spending to be managed over time and through different
states of the world. The financial system plays a crucial role in allocating economic resources and
managing risks. Businesses, households and communities rely on a well-functioning financial
system to live their lives and engage in society.
A sound and well-functioning financial system-encompassing markets, institutions, and payment
systems-serves as a public good, much like physical infrastructures such as transport, energy,
water, and communications, which benefit society broadly beyond individual users
At the same time, we know that financial systems can be inherently fragile and vulnerable.
Financial risks are not always adequately identified, priced, or allocated to those best placed to
manage them. This is illustrated by plenty of examples through history of herd behaviour and
irrational exuberance. In addition, the financial system is highly interconnected, meaning a failure
in one part can quickly spread and endanger the wider system as a whole.
The Global Financial Crisis (GFC) occurred 17 years ago. For some of you in this room, the impact
might feel distant or unfamiliar, while those of us who experienced it firsthand may find our
memories fading. It is important to remember that the costs of financial instability can be felt far
beyond the management, shareholders or customers of individual financial institutions. Again,
history is littered with examples of financial crises that have caused widespread damage to the
broader economy and society.
The fiscal cost of cleaning up a financial crisis is substantial. Global studies estimate that the fiscal
burden can range from 5-10% of GDP. For the New Zealand context, this translates to about
$2040bn. And that's before you count the costs of lost economic activity and the costs to society of
prolonged high unemployment. It is easy to lose sight of the human impact behind these figures -
people's jobs, incomes, savings and retirement funds are all at stake. This is why our key financial
stability legislation for banks is called the Deposit Takers Act - its primary goal is to protect
depositors, who are individuals like you and me.
Defining financial stability
What do we mean by "financial stability"?
It's not enough to say that financial stability is the absence of financial instability.
Even in the absence of a financial crisis, we know from experience that large imbalances and
vulnerabilities can develop during periods of apparent calm, sowing the seeds of bigger troubles
further down the track.
Equating stability with the absence of instability is a bit like saying that peace is the absence of war.
Again, this is too simple. In practice, we know that enduring peace and prosperity involves many
preconditions, like strong relationships with neighbouring countries, common rules, treaties and
trade agreements, acceptance of international law, and much more.
To understand what financial stability means for New Zealand, we need to start by looking at the
pieces of legislation that underpin the Reserve Bank's responsibility for financial stability.3 More
specifically, the Purposes, Objectives and Principles we need to follow along the way (see appendix
A).
This is an exercise that many central banks and prudential regulators overseas have undertaken
over the years, distilling their legislation, frameworks and approaches down into a succinct
definition of what financial stability means to them (see Appendix B).
Recently we've undertaken a similar thought exercise, in part in response to our new legislative
underpinnings, to build a common understanding of our role and approach to decision-making on
financial stability and practically setting prudential policy.
I'd like to share some of that thinking with you today.
 A stable financial system is one where resilient financial markets, institutions and infrastructures
enable a productive and sustainable economy, and ultimately prosperity and wellbeing.
In my view, this simple way to describe financial stability has several desirable features.
1. Outcome focused. This definition is outcome-focused, aligning with our overarching statutory
purpose in the Reserve Bank Act (2021) to "promote the prosperity and well-being of all New
Zealanders and contribute to a sustainable and productive economy".
2. Pre-condition. It acknowledges that a resilient financial system is a precondition to achieving
the broader desired outcomes for New Zealand. Our principal contribution to achieving these
outcomes is through the provision of a resilient system.
3. Dynamic. The concept suggests resilience is dynamic, meaning that a stable financial system
should not only absorb shocks but also anticipate, prepare for, recover from, and learn from
them. Furthermore, our approach needs to serve both the current financial system, and how it
might evolve in the future.
4. Enabling. Finally, this definition acknowledges that a truly resilient financial system must
perform its functions effectively and reliably. Such a system ensures that people can save their
money, handle everyday transactions, access credit for both consumption and investment and
insure against risks. But it must also do so efficiently and in an inclusive manner in part driven
by competition and innovation. I will return to these concepts in a minute, but meeting these
conditions will foster public trust and confidence in the system and the economy as a whole.
While this definition for financial stability has been put together in a New Zealand context, it bears
a striking resemblance to the efforts of prudential regulators in other countries.
That shouldn't come as a surprise, as we all operate collectively as part of the international
financial system. At the Bank for International Settlements (BIS) in Basel global standards are set for
prudential regulators. And the International Monetary Fund (IMF) review the capability and
capacity of countries to meet these standards and approaches through their 10 yearly Financial
System Assessment Programmes (FSAPs). Within these organisations and globally there is
recognition that financial stability is not an end in itself but one of the best tools for supporting
growth and prosperity.
The Financial Stability Frontier
While a resilient financial system needs to be at the centre of our efforts as a prudential regulator,
our definition importantly recognises that resilience alone will not enable a pathway to prosperity
and wellbeing. While stability is a necessary precondition, other important enablers include having
a financial system that is:

competitive,

innovative,
 efficient4 and

inclusive.
These all directly or indirectly feature in our legislation and the Financial Policy Remit from the
Minister of Finance (Appendix C). So, while resilience is our primary objective and underpins our
contribution to financial stability, we must also consider these other factors whenever we make
financial policy decisions.
Sometimes a policy decision that improves the resilience of the financial system may also improve
competition, innovation, efficiency or inclusion. At other times, there may be a trade-off between
resilience and these other factors, especially over the short-term.
Today, I want to introduce the concept of a 'Financial Stability Frontier' to demonstrate how we
weigh up financial policy choices and how they affect these important enablers of the financial
system.5
For illustrative purposes, I'll just keep it to just two dimensions of weighing up the resilience of the
financial system with the amount of competition in the financial system. However, this is a concept
that could equally be illustrated weighing up resilience with any one of innovation, efficiency or
inclusion.
Figure 1. Financial Stability Frontier
Let me step you through the idea.
 On the Financial Stability Frontier, resilience and competition are shown on the Y axis (vertical)
and X axis (horizontal) respectively.

Both resilience and competition are enablers of a productive and sustainable economy, and so
we prefer to have both factors. In other words, outcomes in the top right-hand side of the
diagram are better and outcomes at the bottom left-hand side are worse.

The shaded area represents all the possible combinations of resilience and competition that
can come about from our choices of financial policy settings.

The dotted lines represent the minimal levels of acceptable resilience and competition
respectively. Below these levels are not acceptable setting for our financial policy decisions
(these can be thought of as something akin to risks appetites).

The thick dark line represents the Financial Stability Frontier, which are the limits of what our
financial policy can achieve. When on the Financial Stability Frontier, gaining either more
resilience or more competition involves a trade-off of accepting a lower amount of the other.
Figure 2. Financial Stability Frontier
The Financial Stability Frontier diagram then helps illustrate how different financial policy setting
weigh up against each other. For example,

Moving from point A to point B is a situation where our financial policy improves resilience and
competition. There is no trade off from this policy choice.

Moving from point C to point D involves giving up a lot of resilience in the financial system for
a small amount of additional competition, which may be considered an unattractive trade-off
to accept.

Moving from point E to point F involves gaining a small amount of additional resilience in the
financial system but results in an unacceptably low amount of competition.
While this is a conceptual framework, it is a powerful discipline to be transparent and communicate
how our financial policy decisions affect the important enablers of the financial system, and how
we have weighed up these considerations. It's a process that is more art than science. However,
talking to my counterparts in foreign central banks and prudential regulators, this is a framework
that we all carry around in our heads.
Furthermore, our public consultations are designed to gather evidence and information on these
dimensions, to support our analysis of the costs and benefits, and to share this in regulatory
impact statements. All of this contributes ultimately to sound and transparent policymaking
consistent with our mandate.
To bring this more to life, I want to touch on some practical examples.
 Capital Review. In 2019 we concluded the review of prudential capital requirements for banks.
A key feature of this review was to lift capital requirements to strengthen the resilience of the
financial system. At the same time, we amended a number of capital rules to reduce the gap
between capital requirements for large banks and other banks. As a result, the Capital Review
both increased resilience and took steps to improve the landscape for competiton.
 Mutual capital instruments. One unresolved issue from the Capital Review was a request for a
capital instrument for mutual banks which could qualify as tier 1 capital (without this, mutual
banks are limited in their options to raise tier 1 capital due to their mutual structure). Last year
we decided to establish new mutual capital instrument rules which will help provide new capital
raising options for these banks. Again, this will help to support both resilience and competition.
 Māori Access to Capital. Following the Māori Economy Report (2018)6, we have been working
with the banking industry and other government agencies to remove barriers to access capital,
especially around the treatment of collectively owned land. Through deepening their
understanding of our prudential frameworks, financial institutions have been able to develop
more innovative ways to manage the risk of lending against Māori land. As a result, we have
been able to achieve a similar amount of resilience in the financial system, while enhancing
innovation and expanding inclusion in the financial system.

Macroprudential tools. Earlier this year we activated a new macroprudential tool,
Debt-toIncome (DTI) restrictions, as a guardrail to reduce boom-bust cycles in mortgage lending and
asset prices. Having both DTI restrictions and the existing Loan-to-Value (LVR) restrictions
meant that we could better focus each tool on the risk it was designed to manage. Activating
the DTI tool enabled us to ease the LVR settings, resulting in more efficient use of these tools
while retaining a similar amount of system resilience.

Deposit Takers Act. Finally, we are currently consulting on prudential standards under the new
Deposit Takers Act, including how to apply the new Proportionality Framework. Under the
Proportionality Framework, we can set different prudential requirements for different groups of
deposit takers determined by their size and nature of business. This provides us with scope to
ensure these different groups have a minimum level of resilience appropriate for their
characteristics, while have also having regard for how our decisions can influence competition,
innovation, efficiency and inclusion. A practical example is that we are consulting on the
minimum amount of capital to hold as a deposit taker, which is a potential barrier to new
entrants.
Our strategic themes 2030
Those are just a few examples from our role as a prudential regulator.
However, many of these same principles apply more broadly to our role as a central bank,
particularly as we seek to adapt to our changing economy and society. This work includes
enhancing the cash system, exploring the launch of a central bank digital currency (CBDC), and
considering whether to open access to settlement accounts more widely to non-bank deposit
takers and other Fintechs.
Of course, these enabling characteristics of the financial system do not exist in isolation of each
other. For example, a competitive and efficient financial system cannot exist in a sustainable way in
the absence of resilience. These features of a well-functioning financial system all interact and
enable each other over a long-term horizon.
Reflecting this, in pursuing our operational objectives as a central bank and prudential regulator,
our strategic themes highlight these areas of focus, as we look to the future and our contribution
to a productive and sustainable economy. As outlined in our Statement of Intent7, our strategic
themes are:

Promoting trust and confidence,
 Improving resilience,
 Strengthening efficiency and competition,

Increasing participation in the financial system,
 Leveraging data, information and technology,
 Putting people front and centre.
____________
7
Reserve Bank of New Zealand. (2024). Statement of intent 2024-2028. Reserve Bank of New Zealand.
https://www.rbnz.govt.nz//media/project/sites/rbnz/files/publications/statements-of-intent/statement-of-intent-2024---2028.pdf
Figure 3. Our operational objectives and strategic themes
In New Zealand, our regulators of the financial system come together as the Council of Financial
Regulators (CoFR), each with distinct and connected responsibilities.
These strategic themes mirror those of our colleagues on CoFR. Our outcomes focused and
enabling definition of financial stability requires us to work closely with our regulatory counterparts.
The Financial Markets Authority for conduct, the Commerce Commission for competition, and the
Reserve Bank for financial stability.
Strikingly, in our engagements with Boards and executive teams of regulated entities, these
strategic themes resonate with what they too are seeking to achieve. It is a reminder that we are all
in this together. It is a reminder that when we lift up from the day-to-day challenges in the
financial services industry, we all want a financial system that ultimately contributes to the
prosperity of all New Zealanders.
Conclusion
Thank you again for the invitation to speak with you today at the annual Financial Services Council
Conference.
And congratulations for the choice of Consumer Resilience and Prosperity as one of your themes.
It is a theme that is close to my heart as a central banker and prudential regulator.
For you, the resilience of your customers, the consumers of New Zealand, is a pathway to their
prosperity. For the Reserve Bank, resilience of the financial system is a pathway to enabling a
productive and sustainable economy, and ultimately the prosperity of all New Zealanders.
Standing here today, I am reminded that achieving all this is a collective effort. For all New
Zealanders to thrive, we must work together. I look forward to your engagement and insights.
I am also reminded of a whakatauki;
Nō reira
Nau te rourou, naku te rourou, ka ora ai te iwi.
With our contribution, and your contribution, the people will prosper.
Tēnā koutou, tēnā koutou, tēnā tatou katoa.
Appendices
Appendix A - The Purposes, Objectives and Principles we need to follow
along our way
Reserve Bank of New Zealand Act 2021
Purposes
The purposes of this Act are to-
(a) provide for the continuation of the Reserve Bank of New Zealand; and
(b) promote the prosperity and well-being of New Zealanders and contribute to a sustainable and
productive economy.
Bank's objectives
1. The Bank's main objectives are-
Economic objective
a. the economic objective of achieving and maintaining stability in the general level of
prices over the medium term; and
Financial stability objective
b. the financial stability objective of protecting and promoting the stability of New
Zealand's financial system; and
Central bank objective
c. otherwise acting as New Zealand's central bank in a way that furthers the purposes of
this Act.
Deposit Takers Act 2023
Purposes
1. The main purpose of this Act is to promote the prosperity and well-being of New Zealanders
and contribute to a sustainable and productive economy by protecting and promoting the
stability of the financial system.
2. To that end, this Act has the following additional purposes:
a. to promote the safety and soundness of each deposit taker:
b. to promote public confidence in the financial system:
c. to the extent not inconsistent with subsection (1) and paragraphs (a), (b), and (d), to
support New Zealanders having reasonable access to financial products and services
provided by the deposit-taking sector:
d. to avoid or mitigate the adverse effects of the following risks:
ii. risks to the stability of the financial system:
iii. risks from the financial system that may damage the broader economy.
Insurance (Prudential Supervision) Act 2010
Purposes
1. The purposes of this Act are to-
a. promote the maintenance of a sound and efficient insurance sector; and
b. promote public confidence in the insurance sector.
2. Those purposes are achieved by-
a. establishing a system for licensing insurers; and
b. imposing prudential requirements on insurers; and
c. providing for the supervision by the Reserve Bank of New Zealand (the Bank) of
compliance with those requirements; and
d. conferring certain powers on the Bank to act in respect of insurers in financial distress
or other difficulties.
Financial Market Infrastructures Act 2021
Purposes
1. The purposes of this Act are to-
a. promote the maintenance of a sound and efficient financial system (including by
responding to threats to the stability of, or confidence in, the whole or a significant part
of the financial system); and
b. avoid significant damage to the financial system that could result from problems with
an FMI, an operator of an FMI, or a participant of an FMI that threaten the stability of,
or confidence in, the whole or a significant part of the financial system; and
c. promote the confident and informed participation of businesses, investors, and
consumers in the financial markets; and
d. promote and facilitate the development of fair, efficient, and transparent financial
markets.
2. Those purposes are to be achieved by-
a. establishing a system for designating systemically important FMIs and FMIs that apply
for designation; and
b. imposing regulatory requirements on designated FMIs; and
c. providing for the supervision of compliance with those requirements by the Reserve
Bank of New Zealand and the Financial Markets Authority (acting as the regulator); and
d. conferring certain powers on the regulator to gather information; and
e. conferring certain powers on the regulator to act in respect of distressed FMIs.
3. See also section 77 (which sets out the purposes for which the regulator's powers under Part
4 may be exercised).
Appendix B - Definitions of Financial Stability across the world
 Bank of Korea
◦ "Financial stability can be defined as 'a condition in which the financial system is not
unstable'. It can also mean a condition in which the three components of the financial
system-financial institutions, financial markets, and financial infrastructure-are stable."

Europe Central Bank (ECB)
◦ "Financial stability can be defined as a condition in which the financial system-which
comprises financial intermediaries, markets, and market infrastructures-is capable of
withstanding shocks and the unravelling of financial imbalances."
 Federal Reserve
◦ "A financial system is considered stable when its markets and institutions-including banks,
savings and loans, and other financial product and service providers-are resilient and able
to function even following a bad shock."

Bank of England (in line with the UK Prudential Regulation Authority)
◦ "A stable financial system is one that has sufficient resilience to be able to facilitate and
supply vital services by financial institutions, markets and market infrastructure to
households and businesses, in a manner that absorbs rather than amplifies shocks."
 Reserve Bank of Australia (in line with the Australia's Council of Financial Regulators)
◦ "A stable financial system is one in which financial intermediaries, markets and market
infrastructure facilitate the smooth flow of funds between savers and investors and, by
doing so, help promote growth in economic activity."

Swiss National Bank
◦ "Financial stability is a key prerequisite for the functioning of a national economy and for
the effective implementation of monetary policy. A stable financial system can be defined
as a system whose individual components-financial intermediaries and the financial
market infrastructure-fulfil their respective functions and prove resistant to potential
shocks."
 Bank of Japan
◦ "Financial system stability refers to a state in which the financial system functions properly,
and participants, such as firms and individuals, have confidence in the system."
 Deutsch Bundesbank
◦ "A stable financial system fulfils its central macroeconomic functions smoothly and at all
times. This embraces, in particular, the efficient allocation of financial resources and risks as
well as the provision of an efficient and secure financial infrastructure."

Monetary Authority of Singapore
◦ "MAS seeks [financial stability] to reduce the risk and impact of a failure. ... Promoting a
stable system...requires MAS to meet the other five objectives [safe and sound financial
intermediaries; safe and efficient financial infrastructure; fair, efficient and transparent
organised markets; transparent and fair-dealing intermediaries and offerors; and
wellinformed and empowered consumers.]"

World Bank
◦ "A stable financial system is capable of efficiently allocating resources, assessing, and
managing financial risks, maintaining employment levels close to the economy's natural
rate, and eliminating relative price movements of real or financial assets that will affect
monetary stability or employment levels."
 The IMF (Working Paper No. 2004/187)
◦ "A financial system is in a range of stability whenever it is capable of facilitating (rather than
impeding) the performance of an economy, and of dissipating financial imbalances that
arise endogenously or as a result of significant adverse and unanticipated events."
Appendix C - Financial Policy Remit from the Minister of Finance 2022
Financial Policy Remit
Purpose
This Financial Policy Remit is issued by the Minister of Finance under section 203 of the Reserve
Bank of New Zealand Act 2021 (the Act).
The Financial Policy Remit provides for matters that are desirable for the Reserve Bank to have
regard to in relation to one or more of the following, in accordance with section 204(1) of the
Act

Achieving the financial stability objective
 Acting in a way that furthers the objectives or purposes of the prudential legislation

Acting as a prudential regulator and supervisor under the prudential legislation.
The Reserve Bank Board must have regard to the Financial Policy Remit when acting in relation to
prudential strategic intentions and standards, as set out in section 49 of the Act.
Matters specified in accordance with section 204(1)
Protecting and promoting financial stability can have implications for the Government's broader
policy objectives and the wider economy. It is desirable for the Reserve Bank to have regard to the
following matters.
The Government's desired outcomes for the financial system
It is desirable to have a financial system that is strong, efficient and inclusive, with a low incidence
of failure of entities regulated by the Reserve Bank.
Within the appetite of a low incidence of failure, a competitive financial system should be
encouraged so as to best ensure ongoing financial efficiency and inclusion. In this respect, the
Reserve Bank should have regard to the benefits of:

imposing regulatory and supervisory costs that are proportionate to the expected risks and
benefits to the financial system and society;

encouraging new investment and financial innovation that raise the productive potential of the
economy; and
 encouraging the allocation of financial resources in a way that maximises the sustainable
longterm growth of the New Zealand economy.
If a regulated entity does fail, the Reserve Bank is expected to manage the failure in a manner that
minimises the costs of failure and disruption to the broader economy, and prioritises protections
for vulnerable consumers, depositors and public funds.
Other Government policy priorities
The Minister also considers it is desirable for the Reserve Bank to have regard to the following
matters.
Housing
The Government has a policy objective to support more sustainable house prices, including by
dampening investor demand, which would improve affordability for first home buyers. This is part
of the broader Government Policy Statement on Housing and Urban Development, which provides
a vision that everyone in Aotearoa New Zealand lives in a home and within a community that
meets their needs and aspirations.
Climate change
The Government has a priority of building resilience and facilitating adaptation of New Zealand's
economy, society and environment to climate change. It is important that the financial system
continues to play an appropriate role in supporting community wellbeing and resilience as it
responds to that transition and increases in underlying risks as a result of climate change.
Financial inclusion
The Government has a priority of improving financial inclusion and maintaining financial sector
diversity, including supporting access to finance and financial services for those who are less
wellserved by traditional institutions, including rural communities, disabled persons, low-income
individuals, and small businesses.
Cyber resilience
The Government has a priority of improving New Zealand's cyber resilience, with a vision that New
Zealand is confident and secure in the digital world. In light of evolving cyber risks, it is important
that the public and private sector work closely together to achieve this objective.