example, we require banks to meet prescribed capital and liquidity ratios to minimise the risk of insolvency due to sudden losses or a disruption in funding markets ( we have been consulting on whether baseline requirements should be set to ensure solvency of the banking system in all but the rarest occasions ( a 1 : 200 year event ) or only sufficient for something more frequent ). if cyclical risks become excessively heightened we can enhance resilience by increasing capital and / or liquidity ratios. we can tighten loan - to - value ratio ( lvr ) restrictions if we are concerned about banks ’ lending standards and the growth of household credit together with the risk of a correction in the housing market. our regulatory requirements aim to support effective self and market discipline by providing a basis for directors and the market to assess the well - being of individual institutions. again, supervision has a key role to play, in verifying that regulated entities are complying with regulations and that self and market discipline are operating as intended. … and manage the impact of distress or failure prevention is best, and most of our effort is focused there. nevertheless, despite our efforts to monitor and enhance the resilience of the financial system, institutions may become distressed and even fail. this means we need to be well placed, in terms of information and regulatory tools, to manage these events if and when they do occur. supervision is crucial in helping us understand the balance sheets, operations and the risks facing institutions. this means working closely with firms on their recovery and resolution plans and having a clearly articulated ladder of supervisory intervention. the reserve bank also stands ready to act as the lender of last resort in situations where a liquidity shortfall threatens the viability of solvent banks and causes a significant tightening in credit supply. and a new element of our resolution framework is being proposed. the government has stated its intention to introduce a deposit protection regime that, in the event of failure of a deposit taking institution, would provide that deposits in the range of $ 30, 000 - $ 50, 000 were insured. while protecting bank customers and taxpayers, this could make it easier to close down a failing institution, sharpen incentives on wholesale investors to exert market discipline, and help reduce the likelihood of financial instability through ‘ runs ’ on banks. the reserve bank is uniquely placed … as a full service central bank we are uniquely placed to fulfil our role in maintaining financial stability. that means that, alongside our regulatory and supervisory

of those information gaps. firms ’ disclosure on how they identify and manage climate change risks will help to bring those risks into focus for management and investors alike. after all, it is what gets measured that generally gets managed. and it is far often better to measure something imperfectly than ignore it completely, in particular when this helps guide investor decisions. in measuring climate risk, climate disclosure can shed light not only on those risks, but also transition opportunities. briefly, without adequate disclosure to help identify and price risks, change may be disorderly and much more difficult to manage. historically, the financial system has not fully accounted for the consequences of climate change. but new zealand ’ s financial history is still being written – and disclosure has the potential to be a key part of that story. integrating climate risk now i ’ ll touch on some examples of how we are incorporating climate change considerations into our work to help the financial system play its role in identifying, pricing, and allocating risk. stress testing here at the reserve bank, we began incorporating climate risks into our stress testing last year. stress testing is a tool used to assess the resilience of financial entities to severe but plausible shocks. traditionally, we have used this to explore financial stability risks during endorsement unclassified unclassified economic downturns. expanding this to include climate risks helps us and industry to build capabilities to assess and understand the impact of climate change on the financial system. in 2021, we introduced a climate change risk element into our annual solvency stress test, by including a two - year north island drought in the scenario. our modelling showed that the drought, on its own, did not create undue stress. however, when combined with an economic downturn, the drought caused a 40 % increase in dairy loan defaults over four years, before returning to levels similar to today. this result illustrates the importance of nonlinearities in the financial impacts of climate change. internationally, our central banking peers have also recognised the need to better understand the financial stability risks posed by climate change. in may this year, the bank of england ( boe ) published the results of its inaugural scenario analysis. banks and insurers ’ projections showed that “ climate risks could cause a persistent and material drag on their profitability ”, if they “ do not respond effectively ” to physical and transition risks6. however, their results “ suggest overall costs will be lowest with early, well managed action to reduce greenhouse gas emissions and so limit climate change ”