##bilities with the return on their assets. when interest rates are high, they can generate the necessary revenue by investing in safe assets. when rates are low, they are forced to invest in riskier assets to continue to match the yield on their liabilities. 3 assume now that financial institutions target constant or perhaps even pro - cyclical leverage ratios. if monetary easing boosts asset prices, then bank equity will increase and banks will respond to the fall in leverage by increasing their demand for assets. this reaction reinforces the initial boost to asset values, and so on. the result of this “ leverage channel ” is a more fragile banking system. 4 finally, monetary policy could also affect risk - taking through the expectation of a strong policy response to negative shocks. since the 1990s, central banks have repeatedly provided liquidity to financial markets following market tensions. this channel has sometimes been called the “ greenspan put ”. of course, it can be objected that the asymmetric pattern of booms and busts in asset prices prompts an asymmetric monetary policy response. but it remains true that central bank liquidity provision, while necessary in crisis time, can distort the price signals and therefore the incentives of financial market participants. financial players can afford to take ex ante extra risks, as they can rely on central banks to mitigate the consequences in case those risks materialise ex post. the bottom line of these four arguments is that lax monetary policy has the potential to reduce the market price of risk and thereby trigger a higher degree of risk - taking by financial institutions. some recent empirical studies by ecb staff members lend support to these ideas. 5, 6 see, e. g., de nicolo g. et al., 2010, monetary policy and bank risk taking, imf research department mimeo. see rajan, r. g., 2005, has financial development made the world riskier? proceedings, federal reserve bank of kansas city, august, 313 – 69. see adrian t. and shin h. j., 2009, money, liquidity. and monetary policy, federal reserve bank of new york staff report no 360. one study used the volatility index ( vix ) to test for the dynamic links between monetary policy, stock market volatility and risk aversion. it finds that lax monetary policy decreases risk aversion in the stock market after about nine months. this effect is persistent, lasting for more than two years. moreover

the reserve bank does not conduct on - site examinations of banks'loans and risk management systems, we do meet annually with the senior management teams of the banks. these meetings provide an important opportunity to discuss recent developments in the respective banks, risk management, banking industry issues and other relevant matters. the meetings keep us well informed about each of the banks and the banking industry as a whole, but fall well short of the more intrusive bank examination process typical in other countries. we also differ from many other countries by not having deposit insurance or an explicit depositor protection objective. the statutory objectives of banking supervision in new zealand are to promote a sound and efficient financial system and to avoid damage to the financial system resulting from a bank failure. we are not charged with protecting depositors or other bank creditors per se. we believe the new zealand approach is an effective way of promoting a sound financial system. we also believe it reduces the moral hazard risks associated with conventional banking supervision, and strengthens the effectiveness of market discipline on banks. the fact that the new zealand banking system is currently one of the healthiest in the world - with high asset quality, sound risk management practices and good capitalisation - bears testimony to this. however, we are certainly not complacent, and we remain ever - watchful to detect incipient signs of financial distress, and we stand ready to intervene if necessary. moreover, we regularly review our supervisory framework to ensure that it continues to be an effective means of promoting a sound and efficient financial system. in that context, we are currently reviewing a number of our supervision policies, with a view to further improving the existing arrangements. although some of you will already be au fait with the mechanisms that the reserve bank uses to promote strong corporate governance and risk management in banks, it is probably useful for me to briefly summarise the main features. these policies include comprehensive disclosure requirements for banks, a requirement for bank directors to attest to the veracity of their bank's disclosures and to make attestations on the management of risks, and requirements in relation to the composition of the board of directors. let me elaborate briefly on these features : all banks in new zealand are required to publish comprehensive financial and risk - related disclosures on a quarterly basis, including information on a bank's and banking group's : • capital position ; • concentration of credit exposures to individual counterparties ; • related party exposures ; • asset quality and provisioning ;