% 7. 00 % 20 % 6. 00 % 5. 00 % 15 % 4. 00 % 10 % 3. 00 % 2. 00 % 5 % 1. 00 % 0 % 0. 00 % return on tier 1 capital 12 month average tier 1 capital to tangible assets ( rhs ) 12 month average source : rbnz gds survey data, rbnz calculations. determining appropriate capital requirements is, of course, more than just counting the benefits. the upsides must be balanced against the downside of higher interest rates. we ’ ve anticipated that there will be a 20 to 40 basis point increase in bank margins in the long term as a result of these proposals. 6 while these are relatively small numbers, they will ultimately have an impact on investment and spending in the new zealand economy. our approach from the outset has been to set capital requirements at a level where we can be confident that these costs are outweighed by the benefits of a safer financial system. to calibrate our proposals for new zealand, we drew on many pieces of analysis. these included international literature, stress test results and historical new zealand data on bank losses and loan performance. currently we are reviewing all inputs and modelling assumptions, and carefully assessing submissions, before finalising the plans that will be announced in december. as well as the 6 two of the external experts, dr james cummings and professor david miles, suggest that these estimates may be on the higher side of what is plausible due to the cost of equity being overstated. the summary, as well as their reports, are available on the capital review page on the reserve bank ’ s website. overall level of capital, we are also re - examining all other aspects of the review, such as the quality of capital ( capital instruments ) and the transition path to the new requirements. a well - capitalised banking system also means that our banks will be able to access global funding markets, even in stressed conditions while higher levels of bank capital cannot stop economic fluctuations, it can help banks with even the more moderate downturns, not just the 1 - in - 200 year event we calibrate to. research suggests that well - capitalised banks have easier access to funding than their more leveraged peers during turbulent times. 7 for the economy, this means a weakly capitalised banking system can undermine monetary policy responses to economic downturns as banks may struggle to pass through lower interest rates with their cheaper funding sources drying up. conversely, a well - capital

grant spencer : the impact of the global financial crisis on financial policy summary of remarks by mr grant spencer, deputy governor of the reserve bank of new zealand, at the symposium on financial sector governance, auckland, 20 september 2010. * * * in this presentation, i would like to discuss new zealand ’ s financial policy response to the global financial crisis. my focus here will be on permanent changes to policy following the crisis rather than the initial short term “ emergency ” responses. i will cover financial policies overseen by the reserve bank, namely monetary policy, liquidity management and the prudential supervision of banks and non - banks. monetary policy in new zealand, monetary policy focuses on the maintenance of price stability. this alone provides no guarantee of economic stability or financial stability. however, the experience in new zealand and overseas suggests that maintaining price stability over the medium term is the best and most worthwhile contribution monetary policy can make to achieving broader economic and financial stability. our inflation targeting framework served us well during the financial crisis and helped guide sensible policy responses. immediately prior to the crisis, monetary policy in new zealand had been relatively restrictive with the reserve bank increasing the official cash rate ( ocr ) between 2004 and 2007 in response to elevated inflation pressures associated with a booming housing market. as the global crisis emerged and deepened, we responded by reducing the ocr aggressively. the ocr was cut during 2008 and early 2009 from a high of 8. 25 percent to just 2. 5 percent. these reductions were appropriate, despite high headline rates of inflation at the time due to record high oil prices. the policy easing was consistent with an outlook for rapidly diminishing inflation pressures as the global and domestic economies turned sharply downwards. going forward, medium term price stability will remain the primary objective of monetary policy. however, we expect that monetary policy will have more bite over the next few years than it has had for many years ; for a number of reasons : first, following the crisis our banks now face a higher cost of funds. it is now more expensive for them to borrow offshore, which in turn has seen them compete more aggressively for funds raised in the domestic retail deposit market. we currently estimate that the spread of the banks ’ average cost of funds over the ocr is some 150 basis points higher than prior to the crisis. this state of affairs is likely to persist for some time. it means that, for any given ocr, the rates the banks charge their customers for lending will be higher than before.