to financial stability come from a wide range of sources. external – new zealand ’ s financial system is heavily reliant on external funding, which makes us vulnerable to dislocation in overseas funding markets. domestic – risks related to lending to our dairy industry and to our already highly indebted households. and our most recent financial stability report notes the risks from technology disruptions, misconduct and cybercrime, insurance affordability and climate change. we also have to consider the vulnerabilities of our financial system. it is relatively small, and is dominated by a handful of institutions that have similar underlying business models. that means the distress or failure of one of the major institutions is likely to have significant implications for the system as a whole. and we have to remain alert to new risks. history tells us that there are a wide variety of triggers for financial instability. every financial crisis is different. … and is subject to market failures financial stability is a common resource that benefits us all. but because it is a common resource, it is also prone to the tragedy of the commons – the risk that it is abused and degraded by individual agents who do not have the right incentives to look after it, or at least to internalise the cost that instability imposes on others. viewed through this lens, ref # 8022722 v2. 0 maintaining financial stability depends on market participants being willing and able to identify, price, allocate and manage their risks appropriately. 3 information asymmetries – where one party to a transaction knows more than the other – exacerbate this free - riding problem. small retail savers are likely to find it difficult to detect and price for higher risk - taking at a financial institution, although wholesale investors will exert discipline. in addition there are factors that limit the incentive for financial institutions to internalise the costs to society of a financial crisis. for example, moral hazard can result if institutions believe the taxpayer will bail them out in the event of a crisis. the larger the scale of this distortion, the greater the risk to financial stability and the greater the risk to other regulated entities, investors, depositors and ultimately taxpayers. these structural market failures tend to be reinforced by behavioural factors. it is well recognised that individually rational people make decisions on the basis of other people ’ s credit and risk assessments. 4 this herd behaviour can create market momentum that drives the price away from the underlying risks and returns. in the absence of objective information about the fundamental

##taking activity from banks to finance companies that are currently outside of our banking perimeter, although in a sector as dynamic as the finance industry perimeter issues will never be settled entirely. more work will be required to design the details of this new regime, particularly to ensure that it can be applied proportionately to the biggest australian - owned bank or the smallest credit union. deposit insurance the government has proposed introducing a depositor insurance scheme with a coverage limit in the range of $ 30, 000 to $ 50, 000. there is still a great deal of detail to work through in terms of how the scheme will be funded and operate but we expect the scheme will complement our role as resolution authority. as we work through the details, we will consider the consequences of the scheme for self - and market - discipline, and the need to adapt other aspects of our regulatory and supervisory framework accordingly. part 4 – conclusion financial stability is important for new zealand and all new zealanders. the cost of a financial crisis would be significant and wide - ranging. its effects – in terms of lost output and unemployment – would persist, likely for a decade or more. this means focusing not just on risks to our financial system but on the market failures that can exacerbate these risks and undermine financial stability. the reserve bank ’ s approach to maintaining and promoting financial stability in new zealand is expanding and becoming more intensive, in terms of both regulation and supervision. we are recalibrating the rules and our enforcement of them. this is in response to our own experience and a publicly perceived need for us to do more, and better. by necessity our approach is dynamic : we monitor and enhance the resilience of the financial system and intervene in times of crisis in order to manage the fallout. we do this through fit - for - purpose regulation and risk - based supervision. and we do so in a way where each of the moving parts is complementary in creating a financial system that is sound and efficient. the reserve bank is uniquely placed to do this. as a full service central bank we can leverage our different tools and market functions. that means that, not only can we adapt our regulatory or supervisory response as circumstances dictate, we can also use our markets functions to provide liquidity to the financial system at times of stress. we work with other agencies to promote a dynamic and healthy financial system. we are working hard to set robust requirements that address structural, cyclical and emerging risks in the financial system. our requirements are