unusual in using market value accounting without an indemnity from the government. for example, both the bank of england and the reserve bank of new zealand use market value accounting for securities purchased under their equivalent bond purchase programs but their profits are unaffected by mark - to - market gains or losses because they are offset by a matching entry that reflects the value of their indemnity. what about future profits? despite the fact that the bank can continue to operate with negative equity, the board ’ s view is that it is important that the bank return to positive equity over time. the board has communicated this to the govern ment. while it has not sought a capital injection, the board has indicated to the government that it expects that future profits will be retained by the bank until the bank ’ s capital is restored. the treasurer has endorsed this general approach, noting that under the reserve bank act the issue of distributions to the government is considered each year. one reason why we expect profits in the future is that the majority of the bank ’ s domestic bonds are now carried on the balance sheet at a value less than these bonds will be redeemed at on maturity, so that capital gains are expected to be realised as these bonds mature. this will add to the bank ’ s earnings in future periods. furthermore, the bank is continuing to earn seigniorage on the banknotes it issues. offsetting this, however, is the fact that over the next few years the interest the bank earns on its domestic bond holdings is likely to be less than the interest it is paying on es balances. indeed, as monetary policy has been tightened over the past five months, the interest rate paid on es balances has been rising and we are now in the position where, on average, the interest being earnt on our assets is less than the interest being paid on our liabilities. in other words, underlying earnings are negative. it is difficult to be precise about how long this situation will last or how big these negative earnings will be. the review of the bpp set out four scenarios to illustrate how the bank ’ s future earnings may vary with different assumed paths for policy rates. we can use these scenarios to get some idea of the potential future path of the r e s e r v e b a n k o f au s t r a l i a bank ’ s earnings and net equity position. the bank would incur losses for the next few years, as the interest rate on

instability also has substantial externalities on the economy, and on social cohesion through unemployment. the recent financial crises have brought the failings of the financial system into focus, not forgetting the impact of new technologies, such as high frequency trading, fintechs, or crypto - assets. but rules have their limitations. an ethical approach is needed if we are to respect the spirit of the rules – and not just the letter of the law – and if we are to make informed decisions when clear rules are not available. in addition to financial institutions'in - house ethical practices, the financial sector must now also consider how society – ngos, the media, fellow citizens included – perceive its activities from an ethical standpoint. clearly, the 2007 – 09 crisis was partly created by an imbalance : too much trust had been placed in ethics, while the rules were insufficient. the weaknesses in the corporate culture of financial institutions were thrust into the spotlight ; incentives to take risks were too powerful and governance was inappropriate. 1 / 3 bis central bankers'speeches certain anglo - saxon expressions perfectly illustrate the period : " too big to fail " created a widespread moral hazard, " tick the box " encouraged overly lax self - regulation through a purely formal compliance with the rules... and in so doing, the " light touch " of the british fsa at the time clearly showed its limitations. since then, i am happy to say that we have significantly tightened up the rules. with the crd iv capital requirements directive and basel iii for banks and, at least in europe, solvency ii for insurers, quantitative requirements have been reinforced to ensure greater resilience, governance of financial institutions has been improved and compensation policies for bankers have been reined in a little. international regulation is our common good. it strengthens a sound financial system. but as we strengthen international regulation, we must not lower our guard in terms of ethics. ten years later, this would generate the opposite imbalance to that of 2007 – 08. in other words, there's a risk that the pendulum could swing back the other way. 2. ethics must permeate the day - to - day practices and culture of financial institutions. over and above the good intentions, declarations and codes of conduct, which did nothing to prevent the excesses that caused the 2008 crisis, the challenge now is for all actors from the bottom to the top of these organisations to adopt an ethical approach. as the " banking conduct and culture