ratio loan to value restrictions liquidity standards collateral standards / rmos lolr foreign exchange intervention infrastructure fmi rules and powers monitoring financial stability report stress testing supervision & engagement thematic reviews enforcement investigations directions monetary ocr policy crisis obr management statutory management ref # 7821869 v2. 0 time event varying figure 2 : the cost of recent bank failures on society fiscal cost as % of banking system assets uruguay korea greece finland czech japan iceland ireland netherlands slovenia sweden uk norway usa belgium austria spain denmark germany france luxembourg italy portugal source : imf ( 2013 ) systemic banking crisis database 0. 0 5. 0 10. 0 15. 0 20. 0 % of banking system assets figure 3 : the capital - output ‘ sweet spot ’ ref # 7821869 v2. 0 25. 0 30. 0 35. 0

in well developed bond markets internationally and, as such, play an important role in allowing a wide range of market participants to manage and allocate interest rate risks. the advantage of bond futures is that their trading is not constrained to the total amount of government securities on issue, meaning that liquidity problems are less common once the futures market is developed. the futures market in new zealand has struggled to develop because of a few factors. an important issue is the ‘ chicken and egg ’ syndrome again, where market participants have been reluctant to trade futures until liquidity has improved, but liquidity will not improve until more participants enter the market and trade. another issue has been the historically dominant position of the over - the - counter inter - bank market for physical government bonds in new zealand, which has tended to attract the trading activities of local banks who are the price - makers in that market. the recent reduction in local interbank government bond trading ( reflecting a lack of availability of physical government bonds to trade ) may mean local banks will have more of an appetite to trade and offer bond futures trading services in the future. regarding the potential for rejuvenating the corporate bond market, there may be reason to reassess the efficacy of the approved issuer levy placed on securities issued. in 1993 the new zealand treasury announced that they would pay the ail on new zealand government bonds, which led to the rapid expansion of the new zealand government bond market. subsequently, the ail has remained an impediment to non - government securities issues and has driven many corporate to borrow in lower interest rate offshore capital markets purely to lower their ail commitments. it is interesting to note that in australia a " public offer test " was introduced to enable australian companies to issue local currency bonds to foreign investors free of any non - resident withholding tax or levy. this enables australian companies to issue local currency bonds that are treated equally by both domestic and foreign investors. given the efforts new zealand borrowers take to avoid the ail, and given that it collects only marginal revenue, it may be appropriate to reassess it. we note that the government is currently seeking submissions on the appropriate calibration of taxation on non resident withholding tax and the ail regimes. from a capital markets development perspective we see merit in changes that reduce the incentives for security issuers to issue outside of the domestic market. more generally, other crown initiatives will have an important bearing on the development of new zealand ’ s capital markets