to you that i believe that market disciplines are more likely to be effective where banks are required to make comprehensive disclosures on a frequent and timely basis. the disclosure requirements should focus on the key aspects of a bank ’ s financial performance and risk profile, and should be made with sufficient frequency and timeliness as to provide the market with a meaningful basis for assessing a bank ’ s financial condition and comparing one bank with another. disclosure is likely to be more meaningful and effective if it is supported by robust accounting standards which have the force of law. certainly, in the case of new zealand, we have found that our disclosure regime has been assisted greatly by the introduction of legally binding and more rigorously drafted accounting standards. moreover, disclosure requirements should ideally be coupled with an appropriate legal framework governing bank directors - a framework designed to focus directors ’ attention on their duties to manage the affairs of their bank in a sound manner, and to hold them to account for any breaches of those duties. however, as they say, there is a time and a place for everything. and so it is with disclosure. i think we would all agree that it would not be helpful to introduce new disclosure requirements at a time when the banking system is in a fragile state. doing so could well exacerbate the situation. that is why, in new zealand, we introduced the disclosure regime at a time when the financial system was in a strong position and therefore when disclosure would assist in maintaining confidence in the banking system, rather than detracting from it. finally, the effectiveness of market disciplines through public disclosure will obviously be influenced by the infrastructure within which banking operates. by “ infrastructure ”, i refer to such matters as : the nature and adequacy of corporate law ; the - 12 - adequacy of accounting standards and auditing requirements ; the sophistication and integrity of the accounting profession ; and the adequacy of the financial news media and financial professionals. all else being equal, the more well developed the infrastructure, the more likely it is that market disciplines will be effective. this suggests that, in the case of some developing countries, where perhaps the infrastructure is not well developed, the scope for using disclosure to promote market disciplines is somewhat more limited than would otherwise be the case. but even in such cases, i would not dismiss the potential merits of developing relatively simple disclosure requirements, drawing on international accounting and auditing standards as appropriate, as a means of promoting some rudimentary

any form of on - site examination of banks. these distinguishing features continue to apply under the new supervisory framework. in late 1991 we commenced a major review of our banking supervision arrangements. the review was motivated by a number of concerns. probably the main reason for commencing the review was a concern that conventional approaches to banking supervision generally make insufficient use of market disciplines as a means of promoting a sound and efficient financial system. we believed that there was considerable scope to use market disciplines to promote systemic stability. in particular, we wished to provide the market with a greater capacity to hold the directors and management to account for the sound management of their bank. and we wanted to improve the market ’ s ability to make well informed decisions as to which banks they would do business with. as i note later in this address, we concluded that the introduction of a well focused and comprehensive disclosure regime would go a long way towards achieving these objectives. another factor which led us to review our banking supervision arrangements was a concern at the compliance costs and regulatory distortions which can be associated with conventional approaches to banking supervision. this concern reflects our view that banking supervisors tend to have strong incentives to promote a stable financial system, without always having appropriate regard to the compliance costs and regulatory distortions to which supervision and prudential regulation can give rise. we were also concerned at the taxpayer risk involved in the traditional approach to banking supervision. although this risk is present regardless of the form banking supervision takes, it is likely to be greater where the banking supervisor, and only the banking supervisor, has regular access to financial information on a bank. it is also likely to be greater the more intensive the supervision process is. we wanted to explore ways of reducing the risk of the government being called upon to rescue a bank in distress. finally, we recognised that conventional banking supervision can only go so far in promoting a sound banking system. there are inherent limitations in the extent to which prudential regulation and supervision, even supervision which includes on - site examinations, can minimise the incidence of bank distress and failure. this is evidenced by the fact that countries with intensive supervisory regimes have not been immune from serious episodes of financial distress. indeed, we were concerned that banking supervision could even be increasing the risk of bank failure or distress, by potentially reducing the incentives for bank directors and managers to make their own considered judgements about what constitutes prudent behaviour. the new approach to banking supervision in new zealand in the light of these concerns, and following a lengthy period