much less of a problem in australasia, impaired bank balance sheets in the northern hemisphere are casting a long economic shadow. some banking systems remain weighed down by non - performing loans, while markets for securitised loans are still largely moribund. financial institutions and their funders appear to have recognised the importance of robust funding, loss - absorption capacity and clarity about bank balance sheet exposures. the risk aversion in global credit markets is still reaching our shores via bank funding markets, in the form of elevated funding spreads and a heightened demand for local deposits. although these developments at least partly reflect a transition to “ new normal ” balance sheet structures, it is also possibly a sign that the pre - crisis model of highly leveraged and interconnected banking may no longer attract investors. that of course could be a helpful thing for macro - financial stability and for the rebalancing of non - bank balance sheets – provided it persists when good times return. the new environment creates some structural and strategic challenges for the global financial industry. much - reduced financial engineering and weaker financial institutions are likely to see some retrenchment of certain banking activities. also, with very low yields, financial institutions subject to obligations or strong expectations to pay fixed returns ( such as pension funds ) face pressure to increase holdings of risky assets, so they can support these returns. a renewed search for yield for these reasons raises the risk of excessive investment or bubbles in such lower quality assets. global spending and investment appear very cautious, and seem likely to remain so for some time, given the overhang of debt from before the crisis. in advanced economies, deleveraging in the private sector appears to have started, but will take a long time – perhaps a generation. very cautious households are a large part of the story of a slow and fragile recovery. they have been hit hard by sustained labour market weakness, and in the us and some other advanced economies this has been compounded by loss of housing wealth and balance sheet weakness. the apparently lower appetite for debt among new zealand and australian households is an interesting departure from the recent past, or perhaps a return to the more restrained standards of post - war years. in new zealand, this continues, despite an emerging pickup in housing market activity ( albeit off a very low base ). for example, new zealand household credit growth has traditionally tracked the value of house sales, but this relationship has loosened since the crisis. household caution is understandable given the restrained growth outlook,

interest rate ( the “ cash rate ” in this part of the world ). one such tool is purchases of long - maturity financial securities in large volume on the open market, called “ quantitative easing ” or qe. these purchases have been most prominently carried out by the us fed and the bank of england, causing roughly a tripling and quadrupling, respectively, of their balance sheet sizes to date ( figure 5 ). one channel by which qe is believed to work is by increasing demand for the targeted securities, raising their prices and hence reducing interest rates on them, which should then flow through to longerterm interest rates in general. other possible channels include exchange rate impacts and signalling of a central bank ’ s expectations to keep policy rates low. unconventional policies can have unconventional side effects. we are currently observing spillovers from large economy qe impacting capital flows and exchange rate pressures in small open economies. continuing exchange rate pressure is problematic for a country like new zealand. bis central bankers ’ speeches figure 5 central bank asset holdings source : bloomberg. in the face of plummeting demand, many countries hurriedly enlisted discretionary fiscal policy also. with a fiscal and credit stimulus package of 4 trillion yuan ( about 600 billion us dollars, or 14 % of chinese gdp ), china carried out the biggest fiscal stimulus in post - war history. fiscal stimulus packages were typically worth several percent of gdp, with the cumulative expansionary shift of the fiscal stance over the three years from 2007 to 2009 amounting to four percent of gdp in both advanced and emerging economies. these expansions are now being wound back ( figure 6 ). figure 6 shifts in fiscal stance source : imf. bis central bankers ’ speeches 4. sovereign credit challenges, 2010 – in many advanced countries, the recession - induced reductions of tax revenue and increased social spending were compounded by governments taking on debt to support the banking sector. these actions brought forward sovereign debt sustainability problems in some countries, particularly in europe. by the second quarter of 2010, sharply rising concerns about the fiscal position of first greece, and then other non - competitive indebted euro area countries, were quickly reflected in the interest rates they had to pay in sovereign funding markets. markets made and continue to make sharply differentiated judgements about sovereign creditworthiness across the euro - area countries, placing considerable strain on euro - area political and economic institutions. the crisis also refocused public and market attention on the fiscal cost of aging populations. the projected sharply increasing