grant spencer : the impact of the global financial crisis on financial policy summary of remarks by mr grant spencer, deputy governor of the reserve bank of new zealand, at the symposium on financial sector governance, auckland, 20 september 2010. * * * in this presentation, i would like to discuss new zealand ’ s financial policy response to the global financial crisis. my focus here will be on permanent changes to policy following the crisis rather than the initial short term “ emergency ” responses. i will cover financial policies overseen by the reserve bank, namely monetary policy, liquidity management and the prudential supervision of banks and non - banks. monetary policy in new zealand, monetary policy focuses on the maintenance of price stability. this alone provides no guarantee of economic stability or financial stability. however, the experience in new zealand and overseas suggests that maintaining price stability over the medium term is the best and most worthwhile contribution monetary policy can make to achieving broader economic and financial stability. our inflation targeting framework served us well during the financial crisis and helped guide sensible policy responses. immediately prior to the crisis, monetary policy in new zealand had been relatively restrictive with the reserve bank increasing the official cash rate ( ocr ) between 2004 and 2007 in response to elevated inflation pressures associated with a booming housing market. as the global crisis emerged and deepened, we responded by reducing the ocr aggressively. the ocr was cut during 2008 and early 2009 from a high of 8. 25 percent to just 2. 5 percent. these reductions were appropriate, despite high headline rates of inflation at the time due to record high oil prices. the policy easing was consistent with an outlook for rapidly diminishing inflation pressures as the global and domestic economies turned sharply downwards. going forward, medium term price stability will remain the primary objective of monetary policy. however, we expect that monetary policy will have more bite over the next few years than it has had for many years ; for a number of reasons : first, following the crisis our banks now face a higher cost of funds. it is now more expensive for them to borrow offshore, which in turn has seen them compete more aggressively for funds raised in the domestic retail deposit market. we currently estimate that the spread of the banks ’ average cost of funds over the ocr is some 150 basis points higher than prior to the crisis. this state of affairs is likely to persist for some time. it means that, for any given ocr, the rates the banks charge their customers for lending will be higher than before.

of crisis. the srm is a necessary complement to the ssm and, together, they represent two sides of the same coin : they aim to facilitate the orderly recovery or resolution of institutions in the event of insolvency. there was also talk of a third pillar in the form of a single deposit guarantee scheme. but this would entail joint, cross - border fiscal responsibility, which is a step that policymakers are not yet prepared to take. the recently revised eu directive on deposit guarantee schemes did, however, bring about greater harmonisation in european deposit guarantee schemes. it is now more or less exactly one month since the ssm came into force. on 4 november, the ecb took on the far - reaching supervisory responsibilities assigned to it for credit institutions in the euro area. in the ssm, the ecb and the euro - area national competent authorities work together. the division of tasks between the european and national institutions is based on the distinction between significant and less significant institutions. specifically, the following institutions are defined as significant : banks with total assets of more than €30 billion or more than 20 % of national gdp with total assets also in the latter case having to amounting to at least €5 billion ; banks receiving direct or indirect assistance from the efsf or the esm ; bis central bankers ’ speeches the three most significant credit institutions in an ssm member state. these are “ either / or ” criteria. this means that one criterion alone is sufficient to classify the institution as “ significant ”. for such significant institutions – at present, there are 120 of them with roughly 85 % of aggregate total assets across all banks – the ecb is taking on complete supervision. for the 3, 600 “ less significant ” institutions across europe these tasks will be performed by the national supervisory authorities. so, about 1, 700 german institutions will still be subject to ongoing supervision by the bundesbank and potential measures by bafin. nevertheless, the ecb exercises oversight over the system as a whole. the ecb is to ensure consistent and high - quality supervisory practice in the ssm by setting standards and issuing instructions. the european banking authority ( eba ) is responsible for the development of regulatory standards for european banks ; compliance is a matter for the ecb and the national competent authorities. european supervision will make a major contribution to the integration of the financial markets by means of uniform standards the separation of bank and sovereign risks and the stability of the financial market. from an it