is unclear exactly why new zealand banks have not been more active users of securitisation. possible reasons include new zealand banks ’ current credit ratings and the pricing of bank debt and subordinated debt that make it more attractive for banks to keep mortgage loans on their own balance sheet. there are also up front costs to securitisations and banks may be looking for a more liberal treatment of securitisations with originator - provided credit enhancements for regulatory capital purposes. our work on implementing basel ii capital adequacy rules is designed to more closely link the risk banks are taking with their regulatory capital requirement. for securitisation, the key element is determining the extent that a bank has passed on the risks associated with the mortgage loans to the investors in the securitisation and whether it retains exposure to the risk of the loans in form or substance. in carrying out our review of capital adequacy requirements relating to securitisations we will aim to ensure that banks are required to hold an appropriate level of capital to cover the risks they incur, without overlooking the extent to which the securitisation may result in risk reduction for the institution. non - bank sector meanwhile, non - bank financial institutions ( such as building societies, credit unions, and finance companies ) may also potentially fill gaps in the range of financial services offered in new zealand. this tends to occur through specialising in the provision of services to particular sectors, groups, or regions. these institutions also increase competition, add to financial depth and liquidity, and provide a wider choice of product set for capital raising and investors. hence, it is in new zealand ’ s interest to have a sound and dynamic non - bank financial sector. at present the bank is playing its role in the government ’ s review of the regulation of many aspects of new zealand ’ s financial system. 11 the main aim of this review is to ensure that the myriad of legislation in this area does not create unintended and undesirable distortions in the competitive environment, that unnecessary compliance costs remain are reduced, that the objectives of regulation are clear, and that investors are well informed in order to make good investment decisions. while final decisions related to the review are some months off yet, we are confident that the outcomes will include improved information flows to investors and some improved efficiencies for non - bank financial institutions. capital markets there appears room for new zealand ’ s capital markets to develop. one area to better

alan bollard : delivering sound and innovative financial services for new zealand background paper for an address by dr alan bollard, governor of the reserve bank of new zealand, to the canterbury employers ’ chamber of commerce 1, christchurch, 26 january 2007. alan bollard, adrian orr, and david drage wrote this paper. the authors would like to acknowledge the assistance of a range of reserve bank staff in putting this paper together. any errors are the responsibility of the authors. * * * an important issue for the economic performance of new zealand is whether new zealand has the financial services on offer that will best enable the allocation of our resources to their most productive uses – both from the perspective of the investment product choice set an individual faces when saving and the options available to firms when raising capital. new zealand ’ s rather unique financial market and institutional structure suggest that there is room for further development. this includes expanding the width and breadth of new zealand ’ s capital market, enhancing the performance of the non - bank financial sector, and raising the total pool of financial savings and financial literacy. in doing so, new zealand ’ s financial system will be more dynamic and sound, potentially raising our sustainable economic growth performance. this paper outlines the important influence the financial system has on economic growth, highlights some of the unique features of our system, and discusses how the potential gaps and vulnerabilities in new zealand ’ s financial system could be addressed ( including actions the bank is undertaking ). the important role of the financial system it is well known that new zealand is, and has been for a long time, dependent on foreign savings for its investment capital. new zealand finances around a third of its national investment spending through domestic savings, with the remaining two thirds financed from abroad. given the many positive features of new zealand ’ s economic and institutional structures, foreign savers have remained prepared to invest in new zealand. in part we choose to access global savings because of the relatively small scale of new zealand ’ s capital demands compared to the global pool. both the price of capital and its means of delivery ( or intermediation ) are some of the most important determinants of the quantity and quality of investment in new zealand. the financial system plays the central role in informing and facilitating these saving and investment decisions. it enables the vast majority of economic exchange to occur – both between people and across borders, and through time. as such, the financial system plays a pivotal role in the efficient allocation of economic resources