us and europe in the second half of 2007 spilled over onto new zealand shores instantly. the spread between local short - term interbank interest rates and expectations of official rates rose, reflecting the increased premium on liquidity worldwide. however, although there was a degree of friction in trading conditions, money generally continued to flow. as a precaution, the reserve bank introduced a range of measures to expand the scope of our money market operations, along the lines of those taken by central banks elsewhere, in order to ease the liquidity pressures that had emerged in the local interbank market. as the baker and rosnick ( 2008 ). international turmoil continued into 2008 and deepened, we broadened our liquidity facilities further, primarily as a precaution to ensure that the banking system could handle any additional liquidity pressures were they to arise. the international financial turmoil arrived at a time when a number of local finance companies were already under pressure, largely due to credit weaknesses specific to that sector and to particular institutions. the failure rate in the non - bank deposit - taking sector increased as funding became more difficult to obtain. however, the solvency of the core new zealand financial system was not in doubt, and still is not. we stepped up our usual prudential supervision activities with banks, both to increase the chances of detecting problems and to ensure that banks themselves were doing everything they could to mitigate their liquidity and other risks. table 1 lists the major changes to reserve bank ’ s liquidity facilities and liquidity management processes to date. 2 table 1. changes to new zealand liquidity management arrangements announcement date measure 23 aug eligibility of new zealand bank bills for acceptance in the overnight reverse repurchase facility 7 may eligibility of aaa - rated new zealand residential mortgage - backed securities and new zealand wider government sector debt for acceptance in reserve bank liquidity operations extension of the maximum term of the overnight reverse repurchase facility from one day to 30 days 9 oct eligibility of residential mortgage - backed securities in reserve bank liquidity operations prior to the securities receiving formal ratings 29 oct establishment of reciprocal currency swap line with united states federal reserve 7 nov introduction of term auction facility for injection of cash for terms up to 12 months introduction of reserve bank bill tender 12 dec eligibility of highly rated new zealand corporate securities and new zealand dollar asset - backed securities in reserve bank liquidity operations the australian and new zealand governments also introduced guarantees of bank liabilities around the time that they were introduced offshore. in the new zealand case,

farreaching change. we need to understand better how financial risks can reinforce each other and harm the macro - economy. households, firms and banks will naturally be very cautious during this process. however, we should also be watchful for the opportunities, and mindful of the risks of defeatism. within the western world, new zealand ’ s economy and financial system are relatively well - placed to weather the adjustment. our challenge will be to remain well - positioned to take advantage of the economic recovery when it arrives – possibly suddenly and strongly, which has been new zealand ’ s experience in the past. households and firms should not pull down the shutters, and banks should continue to lend on sound business propositions. references baker, d and rosnick, d ( 2008 ) the impact of the housing crash on family wealth, july, center for economic and policy research. downloaded at www. cepr. net nield, i ( 2008 ) “ evolution of the reserve bank ’ s liquidity facilities ”, reserve bank bulletin, 71 ( 4 ), pp. 5 - 17.