much bigger in gross terms. they, however, look much less balanced because such a dominant proportion of their assets are held in housing, with a relatively small proportion of wealth held in equities, bonds and other instruments. this is in contrast to other oecd countries. source : oecd, rbnz. this is worth focusing on because the same phenomenon is happening to a large extent in the farming sector. farmers are unusual because statistically they constitute both households that consume and businesses that produce, thus complicating analysis of balance sheets. but when we look at farms as a business we see some trends that look rather like urban households. source : quotable value ltd. farmers with strong pay cheques over the last five years have been responsible for some of the pressure on housing and on second homes around the countryside ( one reason why this housing boom has been much more regionally diverse than the auckland - dominated house boom of the mid1990s ). source : reinz. in addition, agricultural land prices have been bid up significantly, a consequence partly of good commodity prices, partly of farm aggregation, partly due to productivity increases, partly due to fonterra - supply effects, and partly due to the availability of cheap credit. we have seen a strong period of lending to the farming sector. these are largely rational reasons why farmers might be willing to pay higher prices. source : rbnz. however these values are changing the nature of some farm balance sheets : it has become increasingly hard to try to rationalise prices paid for land using estimates of the future flow of income from the land. such estimates have always revealed a " rural lifestyle premium " for agricultural land, but this premium is now starting to look rather unrealistic. higher prices for land have looked reasonable when compared to product prices in past years. returns to farming were very good until 2003, as the unusual mix of high international commodity prices and a low new zealand dollar combined to make farming more profitable than any time in the past 30 years. but do high land prices today reflect the future income stream available from the land, or past effects? farmers are effectively saying they expect good export prices to continue into the future. but for land prices to continue to grow at these rates requires improbably high increases in export prices and productivity. there appears to be a gap opening up between land values and expectations of returns. future investment decisions should not be based on the expectation of ongoing double - digit growth in land

related to its size, the nature of its exposures, interlinkages with other banks and so forth. governments are naturally reluctant to see such important institutions fail since economic crises that are accompanied by major banking crises are typically far worse than usual business cycle slowdowns. however, as we have seen from the experience of ireland and iceland, supporting stressed banks can create major fiscal problems, particularly if the banking system is very large relative to the size of the economy. a banking crisis can evolve into a sovereign debt crisis, which itself can have cross - border contagion effects. as mentioned at the outset, the new zealand banking sector did not experience the sorts of problems that affected the us or european banking systems. despite a tightening in lending conditions and standards, which had a significant effect on some businesses, our banking system was largely able to maintain the confidence of depositors and creditors. however, it bis central bankers ’ speeches did still require a backstop of government support. in the aftermath of the crisis we are aligning our prudential initiatives with global efforts focussed on redesigning the regulatory safety net. this improvement in the soundness of our banking system centres on the implementation of stronger microprudential standards ; the development of a new macroprudential framework ; and improved failure resolution management. ( i ) microprudential standards microprudential settings in new zealand were largely appropriate heading into the crisis. both before and after the implementation of basel ii, our capital requirements ensured locally incorporated banks held high quality ( tier 1 ) capital that excluded hybrid debt / equity instruments in order to absorb potential losses. the larger banks that were accredited to use their own internal models to calculate capital requirements under the basel ii guidelines were also strongly encouraged to use risk parameters that “ looked through ” the boom - bust cycle. basel ii largely appears to have served us quite well, although the banks ’ initial modelling of capital requirements for both housing and rural lending was not sufficiently conservative, a point highlighted by the sharp fall in farm prices and earnings in 2008 – 09. in response, the reserve bank has initiated a number of adjustments, most recently a tightening in the area of capital requirements for farm lending. over the course of the crisis the reserve bank introduced a prudential liquidity policy to ensure that bank lending is largely funded by stable ( retail and long - term wholesale ) funding and to ensure that banks have sufficient liquid assets to withstand short - term market disruptions. banks are now also able to