for risk … policymakers must be sensitive to the tradeoffs between more detailed supervision and regulation, on the one hand, and moral hazard and the smothering of innovation and competitive response, on the other. heavier supervision and regulation designed to reduce systemic risk would likely lead to the virtual abdication of risk evaluation by creditors of such entities, who could – in such an environment – rely almost totally on the authorities to discipline and protect the bank. the resultant reduction in market discipline would, in turn, increase the risks in the banking system, quite the opposite of what is intended … supervisors have little choice but to try to rely more – not less – on market discipline – augmented by more effective public disclosures – to carry an increasing share of the oversight load … the potential for oversight through market discipline is significant, and success in this area may well reduce the need to rely on more stringent governmental supervision and regulation. ” 2 i am pleased that the profound truth of this view is being recognised more widely and that international standards are increasingly reflective of this. the use of banks ’ own models in the measurement of market risk is one example. increased emphasis on the role of disclosure is another. these developments recognise that, as banks ’ activities become increasingly complex and change occurs with ever greater rapidity, it becomes more and more difficult to place reliance on detailed rules. often supervisors are dealing with yesterday ’ s problem rather than the one that is emerging today. what we should aim to do is to harness and reinforce market disciplines to achieve the outcome we are seeking – a sound and efficient financial system. bank directors and management have a detailed knowledge of their bank ’ s business. we need to make sure that this knowledge is used in the measurement and management of risk. we also need to make sure that supervision is not carried out in a way that will reduce incentives for bank customers to monitor the performance and risk profile of their bank. to the extent that supervisors ensure that these things happen, we can expect banks to operate more prudently. as supervisors, we need to be realistic about what supervision can achieve. it is certainly clear from the record that there have been significant weaknesses in some countries ’ banking systems, and that speaking at the conference on bank structure and competition hosted by the federal reserve bank of chicago, 1 may 1997. speaking at the american bankers association conference in phoenix, arizona, 11 october 1999. these weaknesses have both contributed to the emergence and severity of financial crises and complicated the task of resolving them.

promoting economic wellbeing : te putea matua optimisation challenges speech to the nz economics forum at waikato university adrian orr, governor 3 march, 2023 introduction tena koutou, tena koutou, tena koutou katoa. thank you for inviting me today – it's great to be back again at this forum. first, i would like to acknowledge the extreme hardship that many people in aotearoa are experiencing at present as a result of the recent extreme weather events. today i ’ ve been asked to talk about how our work at the reserve bank of new zealand – te putea matua can best contribute to the economic wellbeing and prosperity of the people of aotearoa new zealand. that is our legislative purpose – our reason for being. in doing so, i will outline our navigation lights – our legislation and policy remits, how these commitments shape our work, and how we manage the policy trade - offs we inevitably face from time to time. there are three main strands to the work of te putea matua. the first strand is our monetary policy work. through our role as the supplier of a fiat currency – the new zealand dollar – we aim to keep consumer price inflation low and stable through time. our desire is to maintain the purchasing power of our currency through time, by moderating economic demand to broadly match the supply capacity of the new zealand economy. in doing so we meet the necessary criteria of a trusted currency – it is seen as a unit of account, a means of exchange, and a store of value. we aim to slow ( or accelerate ) domestic spending and investment if it is outpacing ( or falling behind ) the supply capacity of the economy. we do this by influencing people ’ s incentives to spend or save by altering the level of short - term interest rates. however, we are humble in our ability to achieve stable consumer price inflation all of the time. our monetary policy tools are limited, and there are long and uncertain lags between what we do with interest rates and the inflation outcomes. meanwhile, economic shocks are just that. for example, in my short time as governor of the reserve bank we have endured covid - 19, the impact of russia ’ s invasion of ukraine, and now the severe weather events impacting many parts of the north island. these events have led to historically significant fluctuations in output, employment, and inflation. te putea matua does