compromised by boom - bust cycles, which is why there has been a resurgence of interest in how we might avoid or reduce these. during booms, lending standards may fall significantly and lenders may underprice risk, with too much credit being allocated to any one sector ( such as the rural sector or property development ). in turn, when the boom turns to bust, the over - allocation of credit may be revealed when physical and human resources become underemployed. international evidence suggests what might be more important for competition and efficiency is how “ contestable ” the banking system ( or individual banking product markets ) is, rather than simply how many banks operate ( i. e. market structure ). contestability is influenced by both the actions of incumbent banks, and by various formal and informal barriers to entry and exit. bis central bankers ’ speeches cross country comparisons undertaken by the oecd suggest formal regulatory barriers to entry and exit to the new zealand financial system are low by international standards. 2. while banks seeking registration must meet minimum qualitative and quantitative criteria so that their entry to the market is consistent with the soundness and efficiency objective, the reserve bank does not impose quotas of any kind nor do we restrict foreign ownership. however, the costs associated with establishing a new retail branch network in new zealand appear to be high given the small scale of the market. notwithstanding the success of kiwibank in the retail market, the fact remains that it is difficult for new players to enter the new zealand market and assume a competitive position other than through direct acquisition of an existing bank or by specialising in a narrow market segment. in terms of informal barriers to entry, one such barrier may come about from the practical difficulties customers face switching between banks. shifting one ’ s banking activities from bank a to bank b is usually a more involved process than shifting between cellphone providers or electricity companies. the customer inertia that this creates makes it difficult for new entrants to gain critical mass even if they price their offerings keenly. encouragingly, some of these barriers may have eased recently through technical innovations at the payment systems level orchestrated by payments new zealand ( pnz ). more switching implies greater incentives for banks to compete and innovate. figure 2 post tax return on equity – oecd comparison ( average 2002 – 2007 ) source : oecd, australian prudential regulatory authority, rbnz calculations. oecd ( 2006 ), competition and regulation in retail banking

sector. all things considered, it seems unlikely that the rates of return in banking enjoyed over the past decade can be sustained in the future. conclusion the global financial crisis has focussed policymaker ’ s attention on making their banking and financial systems safer and more resilient to shocks. while new zealand ’ s bank - dominated financial system stood up well during the crisis and does not require the extensive overhaul required in some countries, we have continued to develop our prudential policies with the aim of improving the resilience of individual institutions and the financial system as a whole. ensuring that core banking services can continue if any one of our large banks comes under duress, and that the cost of bank failure falls squarely on the shoulders of shareholders and creditors, is another plank in our regulatory reform agenda. notwithstanding the importance of financial system resilience, we also need to understand more about the efficiency of the financial system when assessing its performance and contribution to the economy. bis central bankers ’ speeches