we are increasingly a part of the asian region, and have a vital stake in the prosperity of the region. and in that regard, everybody in this room, and indeed almost everybody in this country, is very much aware of the stresses and strains which several of the countries in the region have been going through in the last few months. even countries which have not experienced severe turbulence in their currency markets in some cases face very considerable pressures on their banking systems, so that it is no exaggeration to say that most of the people in the region live in countries where banking systems are under real strain. oceans of ink have been spilt in analysing the causes of these strains, and this analysis will no doubt continue for a long time to come. most detached observers seem to agree that the underlying problems had nothing to do with the real or imagined activities of foreign speculators but a great deal to do with more fundamental factors, factors which clearly varied from country to country, but which included politically - directed lending by banks, the end of a real estate bubble, sharply increased real exchange rates in a pegged exchange rate situation, a lack of transparency in financial markets, and, dare i say it to this audience, some poor quality credit analysis by some of the banks and other financial institutions. i do not propose to offer my own analysis of the causes of ‘ the asian crisis ’ this morning. i was originally invited to speak about ‘ the role of central banks, the new zealand experience ’. but instead i want to tailor my remarks more specifically to the theme of your conference, ‘ open markets - the implication for banks in the asian pacific region ’. so for this reason i want to focus this morning on a question, namely ‘ in a world of open capital markets, how can central banks best help banking systems remain strong? ’ not surprisingly, my remarks will be heavily conditioned by our own experience in new zealand. while we are all conscious of the strains currently besetting the banking systems in many asian countries, not all of you will be aware that we in new zealand had our own banking system problems less than 10 years ago. as a result of these problems, our largest bank would almost certainly have failed had the government, as majority shareholder, not been willing on two occasions to provide a substantial capital injection. one very major financial institution ( not a bank, but certainly a quasi - bank, and an institution which was in the process of applying for a banking licence ) did

s overall prudential framework for safeguarding financial stability. 4 macroprudential policy is one key part of this prudential framework. we want to use macroprudential tools when risks are particularly high, to build resilience among banks and households, and to mitigate the economic cost of a future crisis. 5 my talk will cover three broad issues. firstly, how does macroprudential policy mitigate risks to the financial system? secondly, looking back, has the reserve bank ’ s macroprudential policy enhanced i am very grateful to bruce lu for considerable assistance in the preparation of this speech, along with valuable comments from other reserve bank colleagues. the loan - to - value ratio is a measure of the size of the loan relative to the value of the borrower ’ s collateral held against the loan, usually expressed as a percentage. lu ( 2019 ) assesses the effectiveness of loan - to - value restrictions in enhancing financial stability, and looks for any side effects. ovenden ( 2019 ) discusses the reserve bank ’ s strategy for operating macroprudential policy. bascand ( 2019 ). macroprudential policy in the new zealand context refers to policies with a time - varying dimension, although internationally the term is broadly used to refer to prudential policies that are focused on the financial system. financial stability, and were there any side effects? lastly, i want to discuss how macroprudential policy should be governed, and the reserve bank ’ s approach to using the tools. part 1 – the role of macroprudential policy to start with, let ’ s take a look at how systemic risks are created from the boom and bust in the financial cycle, and how macroprudential policy can increase resilience of banks and households when those risks are high. when the economy is doing well, banks face competitive pressure to relax their lending standards. when homeowners experience house price inflation, their access to credit will generally increase. as a result, lending to less credit - worthy borrows can increase to an extent that is harmful to society ( figure 1 ), without individual lenders bearing the full cost of higher debt levels. it ’ s no surprise that those dynamics can apply in reverse when the economy weakens : as household incomes fall, the ability of borrowers to service debt is undermined, and defaults increase. this produces losses in the banking system and can trigger a fire - sale of housing, which compounds