the basel committee will be able to finalise and publish these standards in the coming months, particularly those related to the use of internal modelling approaches. however, if this becomes a drawn out process we may need to conclude some aspects of the review without the benefit of a fully agreed basel framework. australian fsi and increased capital requirements the australian financial system inquiry ( fsi ) made three key recommendations on capital standards for authorised deposit - taking institutions ( adis ) : set capital standards so that adis ’ capital ratios are ‘ unquestionably strong ’. raise internally modelled risk weights on residential mortgages to narrow the difference in risk weights between irb and standardised adis. implement a framework for minimum loss - absorbing capacity in line with international practice, to facilitate orderly resolution and minimise taxpayer support. in accepting the recommendations, apra has taken as a guide for ‘ unquestionably strong ’ capital, the top quartile of capital levels of internationally - active banks. to help fulfil the recommendations, apra has over the past year increased residential mortgage risk weights for irb banks to an average level of 25 %. 10 in response, the major banks raised around $ 23 billion in common equity over late 2015 and early 2016, as well as significant quantities of additional tier 1 and tier 2 capital. 11 these capital raisings have bolstered the resilience of the australian parents of new zealand ’ s four largest banks. while this contributes to the ultimate soundness of the new zealand subsidiaries, it does not directly strengthen their balance sheets. the increase in risk weights on australian exposures means that most of the new capital is being absorbed by the need to maintain existing capital ratios in the australian businesses. apra has indicated that their final position on ‘ unquestionably strong ’ is not far off, although detailed capital standards may not be finalised until later in the year. apra had been waiting for finalisation of the basel committee revisions but does not wish to be held up by the current basel impasse. recent comments by the apra chair 12 indicate that the banks should be able to meet any new requirements in an orderly manner. new zealand domestic context the capital review will assess how our future capital framework might be shaped by domestic considerations. these relate to new zealand ’ s risk profile, the shape of our financial system and also our regulatory approach. 4 / 9 bis central bankers'speeches new zealand ’ s exports are concentrated in a small number of commodity -

financial stability. while limited housing supply is at the heart of the problem, strong demand supported by easy credit is underpinning the rapid escalation of house prices. the demand for mortgages is now close to pre - gfc peak levels. if this momentum persists, the housing market pressures could also become a threat to general price stability. bis central bankers ’ speeches the new macro - prudential policy framework has been developed to address just this kind of macro - financial imbalance. the reserve bank is therefore seriously considering the use of macro - prudential policy. while the lvr restriction is more complex and difficult to implement relative to the other macro - prudential instruments, we believe this is the best tool, apart from interest rates, that could moderate the current strength in housing demand. in the current low inflation environment, interest rate increases are not seen as an appropriate response. although they would have benefits for financial stability, lvr restrictions would bring with them efficiency costs. in order to keep these to a minimum, we believe any restrictions should be set as speed limits, and have relatively few exemptions. it is also important to keep the bigger picture in mind when assessing potential efficiency costs. these need to be compared against the significant economic and financial damage that could result from a housing boom that ends in a severe housing downturn. in the pre - gfc housing boom, with hindsight and with this macro - prudential framework, we would most likely have applied macro - prudential instruments with the aim of reducing systemic risk. in the current situation, with house prices and household debt ratios starting from much higher levels, and with interest rates at historically low levels, the risks to financial stability may well be greater. references craig and hua ( 2011 ), “ determinants of property prices in hong kong sar : implications for policy ”, imf working paper, 11 / 277. imf ( 2011a ) “ evidence on house prices, credit, and housing finance characteristics in advanced economies ”, annex 3. 2 in chapter 3, global financial stability report, april. imf ( 2011b ) “ macro - prudential policy : what instruments and how to use them? ”, imf working paper, 11 / 238. imf ( 2012 ) “ recent experience with macro - prudential tools in canada : effectiveness and options going forward ”, chapter 3 in 2012 article iv. igan, d and h kang ( 2011 ) “ do loan