, because they see, for instance, their insurance policies and retirement schemes at risk of not being fully honored. at the same time, low growth implies low return from real investment, and this creates perverse incentives to search for yield taking risk on board ; this may jeopardize financial stability. one main lesson comes from these considerations. the most effective and long - lasting solution to tackle the declining trend of real interest rates is to act forcefully and preemptively to support growth. support remains necessary from the demand side ; but in the longer run it must come from the supply side, by identifying and implementing those reforms that, encouraging investment, may boost productivity and support job creation. we need to prove robert gordon ’ s prophecy wrong. the consequent increase in potential economic growth would raise the real interest rate and push nominal interest rates into a safer territory. reinhart, c. m. and rogoff, k. s. ( 2009 ), “ this time is different : eight centuries of financial folly. ” princeton, new jersey : princeton university press. bis central bankers ’ speeches

grant spencer : prudential lessons from the global financial crisis presentation by mr grant spencer, deputy governor of the reserve bank of new zealand, to the financial institutions of nz 2012 remuneration forum, auckland, 3 may 2012. * * * new zealand has a small open economy and a financial system that is well integrated into the international financial system. so, not surprisingly, new zealand was heavily affected by the global financial crisis ( gfc ) and the global recession that followed. in the real economy, our export prices tumbled and gdp growth remained negative or flat through most of 2008 – 2009. in the banking system, while we saw no failures, the banks were unable to access funding from the international markets for a number of months. this was alleviated through reserve bank liquidity support and government guarantees. in the non - bank sector of course, we saw a string of finance company failures. these were related more to the domestic property sector downturn and weak internal governance than international developments. however, increasing investor caution and competition for funding in the wake of the gfc did increase the funding pressures on finance companies. the gfc has taught us many lessons and it will continue to do so as we witness the follow - on effects of the original shock. today i want to talk about three key lessons from the gfc that i regard as the most important for prudential policy in new zealand. indeed i believe they are very relevant for all countries with well developed banking systems. the three lessons are : 1. the contagion effects of a crisis can be heavily amplified by the contraction of liquidity in funding and asset markets. 2. the credit cycle is a major driver of risk in the financial system – the seeds of crises are often sewn in the credit booms that precede them. 3. large bank failures can have devastating effects on both financial systems and government finances. governments must find ways of protecting the financial system from bank failures without having to resort to bail - outs. i will look at these three lessons in turn, considering the broad international responses we have seen, and looking specifically at what we are doing here in new zealand. the net result of all this is a raft of changes aimed at strengthening our existing prudential regime for banks, which we believe will enhance the soundness of new zealand ’ s financial system going forward. 1. heightened contagion and liquidity risk in the gfc, the first round of credit losses was seen in institutions holding us sub