/ research / workshops / 25sep2006 / 2827569. html tyler, simon ( 2005 ) “ the new zealand corporate bond market ” bis kunming conference. ail was introduced in 1992 as a mechanism to make new zealand fixed income more attractive for foreign investors, by enabling investment free of " non resident withholding tax ". markets, often in a foreign currency that has a lower interest rate structure so as to minimise the cost of the ail. while these activities make financial sense under current tax structures, they do constrain the amount of domestic capital raising activity and the access to high quality debt securities by domestic savers. a deep and liquid foreign currency and interest rate swap market is a strong virtue of the new zealand financial system. however, it is by no means a perfect substitute for a deep and liquid bond market. in particular, interest rate swap trades are only as good as the credit risk associated with the institutions or parties ( e. g., the local bank ) involved in the swap. the swaps market is also subject to liquidity pressures at different points in the business cycle. it may not be as reliable in times of adverse economic conditions, when financial system robustness and a ‘ spare tyre ’ is most needed. enhancing financial system efficiency and soundness to recap, there are several areas of interest with regard to possible constraints on the efficiency and soundness of the new zealand financial system. these include : • the dominance of the banking intermediation channel and concentration of bank ownership to one country, australia ; • the dominance of the derivatives market ( foreign exchange and interest rate swap markets ) in intermediating between foreign savings and domestic borrowing ; and • the relatively small size and role of domestic capital markets. the remainder of this paper highlights some possible actions that may better promote a sound and dynamic financial system. some of these actions sit directly with the bank and progress is being made. however, in doing so, we are acutely aware that just as markets can fail, so can regulatory interventions. our experience suggests that market - based solutions – sometimes with regulatory prompting and encouragement – often result in a better performing financial system. so, with that caveat in place, let me highlight some near - term challenges. banking a near - term issue for bank regulators ( here and abroad ) is whether bank regulatory rules accentuate the pro - cyclicality of bank lending. that is, credit booms and busts are positively correlated with the economic

tool to address the identified risk to financial stability, bearing in mind efficiency costs, the level of effective self and market discipline, and the regulatory framework as a whole. we adapt tools in response to unsustainable booms in credit and asset prices in order to reduce the likelihood of crises. but crisis prevention is by no means assured. as history tells us, crises come from unexpected sources and are hard to predict. so we need robust standards to maintain resilience. minimum capital and liquidity requirements are essential tools for this purpose. we also need tools to manage the consequences if our financial institutions are unable to survive a period of stress or crisis – our crisis management regime that is under review as part of phase 2 of the review of the reserve bank act. our holistic approach to macroeconomic and financial stability as i mentioned earlier, the new zealand economy is in a good space. since the beginning of inflation targeting, macroeconomic volatility in general has declined. inflation is just below the mid - point of the target band, and employment remains around its maximum sustainable level. but we are wary of potential challenges to macroeconomic management. supervision, oversight and disclosure crisis prevention purpose the ocr is currently set at 100 basis points, a historically low level in new zealand, in order to achieve our monetary policy objectives. lower rates still may be needed to achieve our inflation and maximum sustainable employment objectives. the reserve bank is undertaking further preparatory work on less conventional monetary policy tools5 that are available, in the event that the policy rate is pushed down to its effective lower bound. novel monetary policy tools, such as large scale asset purchases and targeted term lending that have been previously used in the united states and the united kingdom, are tailored to support economic activity by strengthening credit growth. however, a highly stimulatory monetary policy stance may lead to over - exuberant levels of credit growth, and as seen in empirical studies in the international literature, may lead to lower lending standards. if looser monitoring standards prevail on the supply of credit, the macroeconomic costs of a severe downturn may be amplified. macroprudential policy can help to manage the movements in credit so as to ensure that macroeconomic booms and busts are not excessively volatile. our assessment of financial stability risks is more nuanced than debt levels per se. we look at the distribution of debt as well as its growth rate, and the sustainability of the asset values it is attached to. while