liquidity requirements of banks, as set out under the “ basel iii ” proposals on prudential standards. the reserve bank expects these new standards to be broadly applied to the new zealand system, with some tailoring for local circumstances. the sovereign debt crisis in part owes its origin to government assistance, sometimes specifically for institutions judged “ too big to fail ”, or more broadly in the form of guarantees to wholesale and retail investors. the former was not seen in new zealand, but guarantees have left their mark. relative to overseas experience, new zealand got off lightly, but taxpayers still bore sizeable losses as guaranteed non - bank deposit takers collapsed for a variety of reasons. the issue of “ too big to fail ” needs to be addressed. for this reason, the reserve bank is focussing on alternative “ failure resolution ” options. for example, the bank is requiring the large banks to pre - position for its “ open bank resolution ” ( obr ) policy. fortunately, the new zealand banking system was relatively well - positioned to handle the fallout from the european crisis as it moved from credit risk to funding risk. the major banks all have similar risk profiles ; their predominant risk exposures are to the local housing market and to agriculture, two sectors that held up relatively well. we are alert to the possibility that the next crisis could impact these sectors in a more systematic way and have moved to enforce capital requirements ( under the basel ii framework ) that are relatively conservative by international standards. we should not over - state what bank regulators can do. sophisticated international regulators were unable to predict and control the crisis. financial innovation was, and will continue to be, an integral part of a growing banking sector. the next crisis will be different, but as in the bis central bankers ’ speeches past, will likely involve the less - regulated parts of the financial system. regulators must be as innovative as the practitioners. there are technical economic solutions to europe ’ s dilemma, but we cannot just assume that politicians can deliver them, given their differing governmental structures, complex coalition agreements, the role of officials, and public sentiment ( e. g. broad - based greek opposition to austerity, washington gridlock on debt ceilings ). it is worth noting that all the peripheral euroeconomies have changed governments since the beginning of the crisis. in the medium term, political stances will need to respond to market pressures, but meantime we are already seeing the enormous political challenges some countries are facing in moving towards sustainable fiscal

acknowledging that impacts may be widespread. even if the consequence for the organisation would be severe, it is best to allocate and manage the risk in the business area that has greatest scope for risk control. • monitoring and review of risks regular risk review is required, to evaluate any changes in the risk or control environment. likelihood and impact vary as political, social and technological factors evolve, and in response to changes in the business and the mitigations put in place. incidents occur and provide insight into risk assessment. the monitoring - feedback loop is a critical part of keeping risk management in focus. • reporting and escalation procedures – as risk severity changes, incidents occur, and risks materialise into issues, it is important that reporting and escalation processes exist. these enable broader perspectives and judgement to be applied in the evaluation and management of risks. project governance processes are standard mechanisms for project risks. supervisory oversight provides a reporting channel for operational risks and the senior leadership group should dedicate time to reviewing strategic risks, but more structured risk reporting processes for material changes in risk should be considered. a risk management committee may be established as one way of reinforcing the review processes. enterprise risk management at the reserve bank the reserve bank has reviewed its enterprise risk management framework ( erm ), and some key insights can be gained from this experience. bis central bankers ’ speeches the institution has one of the broadest sets of functions amongst its global central bank peers. amongst others, its activities include responsibility for monetary policy, regulation and supervision of the financial system, currency ( cash management ) operations, and operations of the payment systems infrastructure. there are considerable risks associated with each of these functions. at the reserve bank we openly acknowledge risk and recognise that an effective enterprise risk management capability is an integral part of successfully running our business. our erm model was developed in - house, following an extensive review of the relevant international standards and research into how other institutions were approaching risk management. it was tailored to meet two critical criteria. firstly, it had to be the right “ fit ” relative to the look and feel of the institution. businesses have unique cultures and values, ways of doing things, and accepted working protocols and erm solutions need to blend in ; otherwise they may not be embraced or effectively used. secondly, the erm model had to be capable of covering all broad policy and operational functions within the bank, and factor in the related external new zealand level risks. these matters were considered essential to winning