. it is not just to traditional businesses, or any one party. easily said, harder to do without a clear desire to work together over an agreed horizon. the reserve bank is working on a few long - term projects itself to ensure that our financial 3 / 5 bis central bankers'speeches system is more resilient to economic slowdowns. our annual report will be made public on monday, outlining a wide range of investment activities. most importantly, we are acting to ensure new zealand remains less susceptible to short - term, sometimes only fair - weather, funding that creates pockets of excess debt and exacerbates economic cycles. we acknowledge that our actions at time may look confusing to the casual central bank observer. on the one had we have set low interest rates to deliberately encourage investment and spending, which may be funded with higher debt. this is how monetary policy works. on the other hand we are saying we are concerned about some pockets of debt – especially in some highly leveraged households ( residential mortgages ), and in some pockets of dairy farming ( rural lending ). so how can we achieve more investment and more resilience at the same time? the good news is we have more than one tool at the central bank, and these tools work over different horizons and achieve different purposes. for example, by now you should all be aware of the reserve bank ’ s capital review proposal. our proposals would see significant increases in shareholder capital in banks. with banks having more of their own ‘ skin in the game ’, the owners will sharpen their long - term customer focus, and it will reduce the chance of a bank failure and the cost on society as a whole should a bank fail. these outcomes are highly desirable for the long - term economic health of new zealand, and should promote deeper and more liquid local equity and debt markets. we finalise our decisions in early - december this year. whatever our final decisions, we will be insisting on transition to higher capital at a sensible pace. but we will be talking more and better quality capital. how have some lenders ( banks ) responded to date? many of the large banks have spent the past 10 or so years lending aggressively to households and the dairy sector during the good times. they have also spent the last 12 months or so revisiting this wisdom, and have been raising their lending margins and / or making credit much harder to access for some customers – especially rural customers. such bank activity is pro - cyclical

during which this correlation has been weak or even negative. last year, for example, after the announcement of the transmission protection instrument ( tpi ), expectations for the future policy rate increased sharply from around 1 % to 3 %. risk premia in sovereign bond markets, however, remained broadly unchanged ( slide 14, right - hand side ). these developments suggest that other factors were also at play. one of these factors is financial market participants ’ attitude towards risk, over and beyond changes in expected default losses. there is a growing literature suggesting that risk tolerance by global investors can explain a substantial portion of movements in asset prices. [ 26 ] monetary policy, in turn, is often an important driver of risk tolerance. this can be seen in corporate bond markets, where credit spreads can be decomposed into a component measuring firms ’ expected probability of default and an “ excess ” bond premium. the latter has been shown to be a powerful proxy of the risk - bearing capacity of leveraged financial intermediaries. [ 27 ] the evidence shows that changes in the excess bond premium can explain virtually all of the conditional response of credit spreads to a change in monetary policy. the reason is that monetary policy tightening typically reduces intermediaries ’ risk - bearing capacity, thereby raising the compensation they require for warehousing risk, over and beyond changes in the quality of borrowers ’ balance sheet. this is precisely what we have seen in the euro area. in the first half of 2022, the increase in the excess bond premium accounted for 80 % of the total increase in corporate bond spreads ( slide 15 ). by october, it still accounted for around two - thirds of the rise in credit spreads. portfolio rebalancing channel in reverse the partial reversal of the portfolio rebalancing channel of asset purchases is likely to have amplified this transmission mechanism compared to previous tightening cycles. indeed, over the course of last year we observed significant portfolio shifts, resulting in large volumes of securities being sold in the secondary market in a short period of time. non - bank financial institutions, for example, have offloaded a notable part of their holdings of lower - rated corporate and sovereign bonds that they had acquired during the period of asset purchases ( slide 16, lefthand side ). regulatory constraints and internal value - at - risk measures implied that leverage - constrained intermediaries which usually absorb these sell orders were facing higher costs for holding more inventory. as a result, intermediaries demanded higher compensation for bearing exposure to