the banks form a very dominant part of the financial sector. registered banks, of which there are currently 18, represent the lion's share of the total financial system, both in terms of total financial system assets and deposit liabilities. in terms of financial system stability, registered banks are by far the most important players in the financial system. and of the 18 registered banks, only about 5 banks could be regarded as systemically important, together holding more than 80 % of total registered bank assets. the new zealand banking system is also unusual in another way - the nature of its ownership. all but two of the registered banks are foreign owned, with the two new zealand - owned banks being very small relative to the system as a whole. the foreign - owned banks operate either as subsidiaries or as branches of foreign banks, with most of the largest banks being wholly - owned subsidiaries of australian and british banks. as i will note later in this speech, this raises particular complications for the nature of the corporate governance arrangements in these banks and raises interesting policy questions for the reserve bank as guardian of the financial system. as i have indicated, a fundamental component of new zealand's approach to the promotion of financial stability is the emphasis it places on the importance of corporate governance as a means of encouraging banks to effectively identify, monitor and manage their business risks. this approach recognises the critical role which directors have in overseeing the stewardship of their bank. indeed, it is worth noting that the new zealand banking supervision framework, with its heavy emphasis on encouraging sound risk management through strong corporate governance arrangements, is somewhat unusual by international standards. in most countries, the standard approach to banking supervision involves reliance on prudential regulation of banks, where a bank's risk positions are substantially constrained by regulatory limits imposed by the supervisory authority. it also typically involves some form of on - site examination of banks by the supervisors. in contrast, the new zealand supervisory framework quite deliberately avoids the use of prudential regulation - except in limited areas, such as minimum capital ratios and limits on lending to related parties. and the reserve bank does not conduct on - site examinations of banks. our supervisory framework is deliberately light - handed in nature, in the sense that we minimise our intrusion into the management of banks'risks and the structure of their operations. instead, we try to foster robust " self discipline " in banks through the corporate governance and disclosure frameworks we have established. that said, i should make it clear that, although

of non - executive directors. and, of course, many countries have their own national codes of good corporate governance, either developed by government or by the private sector. new zealand is no exception, with the institute of directors having issued a raft of very useful guidance material to directors. there are few absolute " rights " and " wrongs " in the field of corporate governance, but some key principles stand out. in particular, let me highlight a few basic principles to which we in the reserve bank attach considerable importance in a banking sector context. • first, i would particularly stress the importance of directors having a sound understanding of their company's business, the nature of its risks and its strategic direction. this provides the foundation for the sound management of any company. it is absolutely crucial in a bank. • second, we firmly believe that the ultimate responsibility for ensuring that a company's risks are being properly identified, monitored and controlled lies in the boardroom. • third, we place considerable emphasis on the importance of having an adequate representation of non - executive and independent directors on the board, and a clear separation of the position of board chairman and chief executive officer. • fourth, it goes without saying - but i will say it anyway - that there is a fundamental need for directors to be scrupulous in ensuring that, individually and collectively, potential conflicts of interest are avoided or at least managed in ways that do not compromise the interests of the company. • we also stress the importance of rigorous internal and external audit arrangements - where the external auditor has a strong measure of independence and is not conflicted by having other significant financial interests in the company. • finally, as the governor of a central bank that has placed strong emphasis on disclosure by registered banks, and which sets high standards on its own financial disclosures, it will not surprise you to know that we stress the importance of regular, timely, comprehensive, meaningful and reliable financial disclosures of a company's affairs. these kinds of principles feature strongly in the reserve bank's approach to the supervision of banks in new zealand. before going on to explain our approach, and the central role that banks'corporate governance plays in our framework, it may be useful to set the scene by highlighting the key features of the new zealand financial system. some of them have particularly interesting implications for corporate governance. the new zealand banking system is relatively unusual by international standards in a number of respects. first, unlike the financial systems of many countries, in new zealand