adequacy is not on favourable or benign economic conditions, or on the " expected " losses that occur as a normal part of banking business those matters should be addressed through provisioning. rather, the focus is on unexpected loss associated with severe downturns in the economy's performance. " stress testing " for such scenarios is required under basel ii, and the scenarios need to account fully for the behaviour of systematic risk. for example, stress scenarios should address the risk of a downturn leading borrowers'risks to correlate more closely, undermining the diversification strategies rightfully adopted by banks to manage risk in normal times. experience shows that downturns in the housing market do happen and can cause significant losses to banks and to the financial system as a whole when they do. the reserve bank will be working to ensure that any internal models used by an accredited bank produce capital estimates that are based on " through the cycle " loss experience - that is, after adjustment for the peaks and troughs in observed losses that occur over the business cycle in new zealand. notwithstanding this emphasis on through - the - cycle loss experience for the purposes of internal modelling, it will also be important to ensure that capital management processes in practice deliver fairly stable capital outcomes through the business cycle. for example, a failure to adjust fully for the business cycle when incorporating loss experience into modelling processes could lead to capital falling during upturns in the cycle and rising during downturns, which would exacerbate the cycle through promoting lending growth during upturns and lending contraction during downturns. capital settings should be for the long haul, and need to be robust over many business cycles and through a range of economic circumstances. an important outcome we will be seeking from our basel ii implementation is that the capital management processes within banks ( both those using internal models and those using standardised approaches ) ensure that adequate " buffer " capital is always held in anticipation of any need to manage any residual " procyclicality " in the outputs of internal modelling processes. as well as making minimum capital requirements more risk - sensitive, basel ii also includes the principle of sharpening the focus of engagement between supervisors and banks on ensuring that a bank's capital management process adequately accounts for the risk of unexpected loss. the quality of this process and the manner in which the outputs from internal models are used within the bank's governance and risk management more generally will be a key part of the assessment for a bank

words, while the average interest rate on deposits has indeed fallen, it has risen relative to the cash rate. the average spread above market rates on the major banks ’ advertised term deposit “ specials ” has increased by about 35 basis points over the past year ( graph 3 ). furthermore, bis central bankers ’ speeches an increase in the share of deposits written at rates higher than the rates advertised by banks has meant that the average rate on outstanding term deposits has not fallen as quickly as benchmark rates, as term deposits have been rolled over. that is, banks have been increasingly paying customers more than the rate advertised in the window if the customer asks for it, reflecting competitive pressures. moreover, there has been some shortening in the average maturity of term deposits recently given the inverted yield curve, which has meant that changes in pricing have passed through more quickly. graph 3 the average advertised rate on at - call savings deposits rose by around 20 basis points relative to the cash rate over 2011. again, in absolute terms, the interest rate declined. taking into account an increase in the proportion of savings deposits earning bonus rates, the average rate on these deposits is estimated to have increased by between 35 and 50 basis points relative to the cash rate. interest rates on transaction accounts have not fallen in line with the cash rate as many only pay very low nominal interest rates. hence, as the cash rate falls, there is no scope to lower the interest rates on these accounts. wholesale debt the absolute cost of issuing new unsecured wholesale debt fell during 2011 ( graph 4 ). relative to risk - free benchmarks, however, the cost of issuing wholesale debt has increased since mid 2011. the increase in spreads on banks ’ wholesale funding reflects global investors demanding more compensation for taking on bank credit risk, although the rise for australian banks has been less marked than it has been for other banks globally. this widening in spreads was at its peak at the beginning of the year but over recent weeks these spreads have narrowed noticeably. bis central bankers ’ speeches graph 4 there has also been an increase in the costs associated with hedging the foreign exchange risk on new foreign - currency denominated bonds. this rise in the basis swap reflected the dearth of kangaroo issuance earlier in the year at a time when the banks were raising foreign - currency debt. the pick - up in kangaroo issuance in recent weeks has alleviated some of that pressure. spreads on banks ’ new wholesale debt have come down somewhat following the ecb ’