differential. currency carry trades, whereby investors borrow in low interest rate currencies to invest in higher interest rate currencies, have been some of the most popular. relatively low interest rates in some economies, particularly japan and switzerland, have been used as the basis for a raft of leveraged investments and in so doing have further fuelled global liquidity. figure 6 : global policy rates source : datastream the events of the past few weeks have provided a timely reminder of the importance of low risk aversion and market volatility for the carry trade. fears sparked by a sharp retracement in china ’ s share market and growing concerns regarding the ramifications of problems in the us sub - prime mortgage market saw investors rush to reduce positions in a range of markets. notably, this episode saw currency carry trades scaled back, with funding currencies strengthening and recipient currencies weakening – although the sell - off proved highly correlated across a wide range of asset classes. this period of turbulence has proved relatively contained to date, with risk appetites and markets recovering. but it does demonstrate the potential widespread impact of an increase in risk aversion and market volatility. figure 7 : market developments since the beginning of the year source : bloomberg 4. how does it impact on the nz economy? given our relatively high interest rates, new zealand has attracted a disproportionate share of global liquidity in recent years, putting upward pressure on the nz dollar despite a relatively large current account deficit. these flows have come in many forms. one particular avenue has been the issuance of nz dollar denominated bonds in offshore markets : eurokiwi and uridashi bonds. the derivative transactions associated with eurokiwi and uridashi issuance have provided a mechanism for the new zealand banks to hedge the interest rate and currency risks associated with their offshore borrowings at cheaper rates than would otherwise have been the case. the upward pressure this has put on the new zealand dollar and downward pressure on interest rates has exacerbated the current problematic imbalance between traded and non - traded sectors in new zealand. figure 8 : offshore nz dollar denominated bond issuance ( eurokiwi & uridashi bonds ) source : reuters ; bloomberg ; rbnz but it is important to recognise that the attractiveness of the nz dollar for offshore investors is not just a reflection of the current level of interest rate differentials, but also investors ’ views regarding their sustainability. in

unclassified towards good governance in the financial system of aotearoa a speech delivered online to the institute of directors on 7 september 2023 by christian hawkesby, deputy governor and general manager financial stability written with esther bonaparte ref # 20585968 v1. 0 unclassified 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 institute of directors who have called us here ; who have welcomed us here ; who have looked after us here. thank you very much ) i am delighted to be with you this morning, both as deputy governor of the reserve bank of new zealand and as a fellow member of the institute of directors. in recent years, i have presented to the institute of directors a number of times, at the annual conference and at branch functions around the country. some of the topics i ’ ve covered have been the maori economy 1, financial inclusion 2 and the future of money. all of these issues are at the heart of central banking in new zealand. they are also topics that i ’ ve found directors and trustees are very keen to understand for their roles. today i am here to discuss a topic at the very heart of the governance and the territory of the institute of directors – the path towards good governance in the financial sector of aotearoa. • • • first, i want to explain the role of governance in reserve bank ’ s approach to prudential supervision and regulation ; second, i want to look back through history to reflect on past governance lessons learned, and discuss how these have shaped governance guidance ; and finally, i will share the outcomes of our recent thematic review on governance and take any questions. i should first acknowledge that at the reserve bank, te putea matua we have been undergoing our own very significant changes in governance. under our 1989 act, the powers and responsibilities of the reserve bank were held by the governor, with the board playing an oversight and advisory role. now under our new 2021 act, the monetary policy committee is responsible for formulating monetary policy and the reserve bank board is responsible for all other governance functions. under this new approach, our board of directors looks much