recovers. moreover, as banks book profits, deferred tax assets will shrink, reducing the magnitude of these future deductions from common equity. finally, it is important to note the significant potential earnings power of large u. s. banks, which have historically tended to have higher rates of return on their average assets relative to many of their foreign counterparts. banks that currently are short of the 2019 standard could retain these future earnings to build up their capital ratios. equity analysts project that the 20 largest u. s. banks will earn more than $ 80 billion in 2010, and consensus estimates expect that figure will increase to around $ 110 billion in 2011. of course, because these estimates are dependent on an economy that continues to recover, we need to be cautious about relying entirely on as - yet - unrealized earnings as the primary means to meet the higher capital standards. so what about the long - run consequences? it would be prudent to assume that requiring banks to hold more capital and higher cost capital is likely to result in somewhat higher lending spreads. bank managements will need to generate sufficient income to support the rate of return on equity at a sufficient high level so banks can continue to attract capital from investors. of critical importance is whether the increase in lending spreads is likely to be large or not. those who argue that the new capital standards will necessitate a large increase in lending spreads generally start with a rigid set of assumptions. these include : 1 ) return on bank equity is unchanged ; 2 ) the increase in bank equity does not affect funding costs ; and 3 ) there is no change in the banks ’ book of business or on banks ’ ability and willingness to adjust other expenses, such as compensation. such rigid assumptions are unrealistic. this is particularly important because each assumption is likely to be wrong in the direction that reduces the impact on lending margins. first, the necessary return on equity that banks will have to generate to be able to attract capital will likely fall. because banks with more capital should be safer and have less volatile earnings, investors should demand a lower return on equity than before. second, by increasing the soundness of banks, an increase in bank equity, everything else equal, should also reduce funding costs. third, higher bank lending spreads almost certainly will push some activity into the capital markets, constraining the magnitude of the rise in total lending costs. finally, banks may be forced via competitive pressures to lower their compensation levels. by cutting compensation costs

but we should be able to avoid the boom / bust cycles of old. if our longer - term growth potential is around 3 percent, it is probably the case that growth outturns in the 1 percent to 5 percent range will be the norm. occasional external shocks and surprises - - climate, international events, and so on - - may take us outside that range. but surprises of that sort should be rare. however, a sustained growth performance within a range of that sort would represent a substantial step up from our experience through the 1960s and 1970s, and would place us somewhere near the top end of the oecd growth league. interest rates are determined by international conditions and local risk factors so what does that mean for interest rates and exchange rates in new zealand over the longer term? essentially, in our world of open capital markets, interest rates in new zealand will tend to settle at some margin above or below a benchmark set in us financial markets. how large that margin is ( and whether it is positive or negative ) will depend on the risks and returns that savers, both domestic and foreign, associate with new zealand. there are, of course, many different risks that enter that assessment. but a key one is the risk of future inflation. a firm commitment to the maintenance of price stability is already resulting in substantially lower interest rates in new zealand. the rate paid by the new zealand government on its new zealand dollar 10 - year bonds has fallen from around 10 percentage points above that paid by the us government on 10 - year us dollar bonds in the mid 1980s, to little more than half of one percent above the us rate. our shorter - term interest rates have also fallen sharply relative to those in other countries over the past decade or so, but they remain high by oecd standards, and high in real terms. that will remain the case so long as the strong demand for borrowing that we have seen over the past several years continues. on that note, it is worth reminding ourselves that the route to consistently lower interest rates lies in allowing both savers and borrowers to become confident that the risk of future inflation is slight. we can ’ t look to the exchange rate to boost international competitiveness a conference examining competitiveness may find it tempting to look to the exchange rate for salvation at some point. don ’ t bother. the forestry industry, like every other export industry in new zealand, is going to have to live with an exchange rate that varies. there is nothing you can