with wider society ’ s. in any event, we have proposed that banks come to the table with more of their own chips, and less of other people ’ s, which will reduce the risk of them folding and reduce the risk of the new zealand taxpayer ever having to step in to save them. 12 note that i am not attempting to draw a direct comparison between banking and the game of poker, other than to highlight that both involve risk - taking. the capital review the economic and social cost dimensions of bank failures are readily understood. the links to bank capital and the reserve bank ’ s regulatory requirements are perhaps less familiar. the reserve bank of new zealand has been undertaking a review of its capital framework for new zealand banks since march 2017. the purpose of the review is to identify the most appropriate capital framework for new zealand banks in order to best enhance the long - term welfare of new zealanders. prior to undertaking this review, we set out these following six key principles for the review : 1. capital must readily absorb bank losses ahead of creditors and depositors. 2. capital requirements should be set in relation to the risk of bank exposures. 3. where there are multiple methods for determining capital requirements, outcomes should not vary substantially between methods. 4. reflecting the risks inherent in new zealand financial system and the reserve bank ’ s regulatory approach, new zealand bank capital requirements should be conservative relative to international peers. 5. the capital framework should be practical to administer, minimise unnecessary complexity and compliance costs, and take into consideration relationships with home - country regulators. 6. the capital framework should be transparent to enable effective market discipline. the magnitude of this review led us to separate it into different phases. the first phase of the review determined the scope of the main issues that would be considered as part of the review. the second phase of the review looked at the numerator – the nature and quality of bank ’ s capital. the third phase looked at the denominator – the bank ’ s assets and their measurement or weighting. we are now in the midst of the fourth and final phase of the review, which focuses on the capital ratio ( the ratio of the bank ’ s capital to its assets ), and what the minimum level of this ratio should be. as a matter of practice, before we change the rules for banks in new zealand, we ask them and the wider public what they think. and we did just that when we released our fourth consultation paper on 14 december 2018

of the relationship between demand and the economy ’ s capacity to supply. but of course this tells us nothing about how fast the new zealand economy can grow without generating inflation. what is that “ sustainable growth rate ”? what, in other words, is the slope of the line a / b? nobody, and certainly not the reserve bank, knows the answer to that question with certainty. but because the answer to the question is so fundamental to our decisions about monetary policy, we can not avoid making an estimate of that sustainable growth rate. we are forced to reach a judgement on the matter. at the present time, we estimate that the sustainable growth rate of the new zealand economy is around 3 per cent per annum. of course, the economy can grow faster than that for a time if it starts from a situation of excess capacity, as was the case in the early nineties and was the case in mid - 1998. but when that excess capacity is used up, the economy needs to slow to about the sustainable growth rate or risk inflation beginning to pick up. some people worry that the reserve bank can do considerable damage to the economy by assuming too low a sustainable growth rate, by assuming, say, a 3 per cent growth rate where in reality the economy could grow at 4 or 5 per cent if only the bank would allow demand to expand more rapidly. but if the economy is really capable of growing at 5 per cent and the bank runs monetary policy on the assumption that it is only capable of growing at 3 per cent, then quite quickly demand will fall below capacity to supply, there will be a strong tendency for prices to fall, and the inflation rate gets pushed down towards the bottom of the 0 to 3 per cent target range. and since we take not going through the bottom of the target as seriously as we take not going through the top, we are forced to ease monetary policy to let demand expand. in other words, we can ’ t avoid making a judgement about sustainable growth, and we can ’ t get it wrong for too long before we are forced to adjust our estimate. indeed, we had a rather higher estimate of the sustainable growth rate of the economy in the mid - nineties but revised it down as we found inflation consistently pushing up towards, and briefly beyond, the top of the target range. whenever any new piece of data comes out about inflation or gdp, we look again at whether our current estimate of sustainable growth is still reasonable. what about the “ new paradigm ”?