donald t brash : promoting financial stability : the new zealand approach address by dr donald t brash, governor of the reserve bank of new zealand, to the conference for commonwealth central banks on corporate governance for the banking sector, london, 6 june 2001. * * * introduction it is a great pleasure to have the opportunity to speak to you today. the theme of this conference – corporate governance in the banking sector – is a subject that has been an important element in the commonwealth secretariat's financial sector work in recent years. it has also been a notable feature of other international initiatives, including those of the international monetary fund and world bank, in their efforts to address the causes of financial crises and to promote greater financial stability. appropriately, improving corporate governance is seen as a significant way of encouraging banks to strengthen their capacity to manage risks. and it has rightly been viewed as an important element in the management of central banks. today, i want to discuss the role that corporate governance plays in the new zealand banking supervision framework and to relate this to the importance we attach to strengthening market discipline in the financial system. but before doing this, let me briefly recap the main points made in the report issued by the commonwealth secretariat last year on the causes of financial instability and the policies for promoting stable financial systems. this provides a useful context within which to discuss the new zealand approach to financial sector regulation. causes of financial instability as indicated in the commonwealth secretariat's paper corporate governance in the financial sector, financial instability is caused by a combination of factors. these include : · rapid financial sector liberalisation unsupported by measures to encourage prudent risk management in the financial sector ; · unsustainable macroeconomic policies, such as loose monetary policy and excessive fiscal spending – such policies can contribute to asset price volatility and a subsequent erosion of asset quality in the financial system ; · exchange rate arrangements that lack credibility, including unsustainable exchange rate pegs – this is particularly important where financial institutions and corporations have come to rely on an exchange rate peg, and fail to hedge their currency risk, only to sustain currency losses when the peg collapses ; · protection against imports and other policies that impede the efficient allocation of resources in the economy ; · poor banking supervision ; · inadequate financial disclosure arrangements, including poor quality accounting and auditing standards ; and · weak market disciplines in the banking and corporate sectors, reducing the incentives for high quality risk management by banks. policies for promoting stable financial systems

temporary shutdown of government services. but the deceleration in other countries, amid a slowdown in global trade flows, surprised many by its magnitude. the eurozone slowed from 2. 4 % in 2017 to 1. 8 % last year, as weakening exports to asia, the united kingdom ( uk ) and eastern europe took a toll on business confidence. the world bank now only expects a 1. 2 % increase in the eurozone ’ s gross domestic product ( gdp ) this year. china has also lost momentum, as earlier policy tightening curtailed lending by the non - bank financial sector and the tariff increases of 2018 weighed on exports. by late 2018, these negative economic surprises had reached levels ample enough to trigger a bout of risk aversion in financial markets, which particularly affected equities 1 media call on the june 2019 global economic prospects report, world bank group, washington dc, united states page 2 of 10 and corporate bonds ( although emerging market currencies and fixed - income markets were relatively sheltered ). global financial conditions tightened. this tightening, however, proved short - lived, as the continuation of benign ( and, in some cases, soft ) inflation developments allowed major central banks to pause, or delay, the start of their normalisation process. in the us, in particular, indications by the federal reserve ( fed ) that it could be patient before making any policy decisions helped equities and corporate bonds to recover their earlier losses. nonetheless, many threats to global expansion remain unresolved, and in some cases risks previously identified have begun to materialise. first and foremost among these are the trade tensions between some of the world ’ s major economies. in the wake of the recent increases in us tariffs on selected chinese imports, and in light of the potential for broader tariff increases, analysts are already anticipating a bigger drag on global growth from what increasingly looks like a protracted trade conflict. in its most recent surveillance note for the g20 finance ministers and central bank governors, for the meetings in fukuoka, japan, 10 days ago, the imf noted these additional tariffs would “ dampen trade and weigh on confidence and financial sentiment, adversely impacting investment and productivity and growth. ” separately, the uk ’ s parliament is struggling to agree on the terms for leaving the european union, with negative consequences for growth and investment and some spillovers to continental europe. financial markets have displayed sensitivity to these developments. at the same time, a number of geopolitical tensions