instruments, ie retail deposits and long term borrowing ( over one year ). bis central bankers ’ speeches the banks ’ core funding ratios had reached very low levels in the period leading up to the gfc. after the crisis, banks realised they needed to strengthen their core funding and were also encouraged to do so by the rating agencies. the new cfr policy reinforces this trend and will ensure that strong funding buffers are maintained in the future, including through periods of greater risk appetite. the cfr is currently set at 70 %. last november, due to difficult international market conditions, the reserve bank deferred a planned further increase in the cfr to 75 % which had been scheduled for june 2012. we are confirming today our intention to increase the cfr to 75 % on 1 january 2013. figure 2 core funding ratio of nz banks ( percent of loans and advances ) source : rbnz the heightened awareness of contagion and liquidity risks has led to a range of other policy responses in addition to the strengthening of capital and liquidity buffers. such measures include extra safety requirements for large global “ systemically important financial institutions ” ( sifi ’ s ), and changes to the “ wiring ” of the financial system in an attempt to reduce contagion risks. examples of such measures include the “ volcker rule ” in the us, which is aimed at isolating the risks from proprietary trading, and the vickers recommendations in the uk, which propose to separate retail banking from investment banking. the challenge for such policies is to achieve a sustained reduction in financial system risk rather than simply distorting market behaviour. some countries have also adopted measures intended to restrict executive remuneration in banking. this has occurred mainly in countries such as the uk and us where bail - outs resulted in the government becoming a major bank shareholder. in australia, apra has not bis central bankers ’ speeches imposed direct controls, but has set down guiding principles for executive remuneration and incentive schemes. 2. countering the credit cycle there is no doubt that the severity of the gfc was aggravated by the sustained boom in asset prices and credit that preceded it. an important contributing factor to the boom was the persistently easy global monetary condition over this period. a further contributing factor was the tendency for prudential policies to be pro - cyclical. for example, new provisioning rules brought in by iasb in the early 2000 ’ s, prevented banks from taking a “ through the cycle ” approach

macro - prudential policy, subject to consultation with government. see reserve bank financial stability reports ; bollard ( 2011 ) “ where we are going with macro and microprudential policies in new zealand ”, speech to the basel iii conference, sydney ; ha & hodgetts “ macro - prudential instruments for new zealand : a preliminary assessment ”, reserve bank of new zealand workshop on macro - prudential policy ; spencer ( 2010 ), ” the reserve bank and macro - financial stability ”, reserve bank of new zealand bulletin 73 ( 2 ). as used to calculate risk weighted assets under the basel capital adequacy regime bis central bankers ’ speeches the natural question arises : how will macro - prudential policy interact with the reserve bank ’ s independent monetary policy mandate? the first point to make is that macro - prudential policy will have an important influence on monetary policy, in a similar way to fiscal policy, for example. thus if macro - prudential policy is acting to dampen aggregate credit and demand, there should be less work for monetary policy to do ( figure 4 ). because of this potential assistance from macro - prudential policy, there may well be situations where monetary policy seeks the support of macro - prudential policy, just as it may seek the support of fiscal policy ( section 10 of rbnz act ). but macro - prudential can only be used to assist monetary policy if it is also consistent with its primary financial stability objective. figure 4 essential monetary and macro - prudential policy interactions source : rbnz an important point to note here is that, like fiscal policy, macro - prudential policy is likely to be on a slower time schedule than monetary policy. changes in the counter - cyclical capital buffer, for example, will require six to twelve months notice for the banks to comply. thus, while we will try to ensure that macro - prudential policy is consistent with monetary policy objectives, these policy settings are less amenable to fine tuning. in that sense, macro - prudential policy is likely to be taken as a background “ given ” when it comes to making short term monetary policy decisions. the final point i must emphasise is that macro - prudential policy cannot replace monetary policy. while macro - prudential can hopefully assist monetary policy, it will never be as powerful or as flexible an instrument as the official cash rate ( ocr ). further experience will