interest rates, now that average debt - to - income levels have essentially doubled. interest rates have been relatively stable in recent years, but there will inevitably be times when pressures on inflation will require interest rates to rise. why is the reserve bank interested in this? obviously, individuals and families may find themselves in difficulties as a result of poor investment and borrowing decisions. my concern is not only about that, but also about the wider economic implications of any such difficulties. the financial health of households is important for the stability of the new zealand financial system and the new zealand economy. households that borrow do so almost entirely from banks, and lending to households makes up about 40 per cent of total bank lending. therefore, the ability of households to service their debts is crucially important to the health and soundness of banks and the broader financial system. as well as influencing the banking system, household investing and borrowing behaviour affects financial stability in new zealand through the country's external financing. household borrowing that is not funded by domestic savings must be financed offshore. partly as a result of strong household borrowing over many years, new zealand has a very high ratio of net external financing relative to our gdp - indeed, one of the highest ratios of any advanced economy. currently, new zealand's net financing from offshore stands at about 90 per cent of gdp, compared with just 60 per cent for australia, 25 per cent for the united states and 15 per cent for canada. new zealand's high dependence on external financing creates a risk that foreign lenders may at some time become more reluctant to increase their exposure to new zealand. this would raise the premium we would have to pay in order to maintain access to offshore funding. foreign lenders may even seek to withdraw their existing funds in new zealand, especially if perceptions about the new zealand economy, rightly or wrongly, take a turn for the worse. a sudden reduction in foreign lenders'willingness to continue to fund new zealand borrowing would force the new zealand economy through a sharp and painful adjustment - possibly including a drop in the exchange rate, a jump in interest rates and gyrations in economic activity. if too extreme, the strain of these adjustments could undermine the proper functioning of the financial system, which would worsen the economic disruption. i should say at this point that, as far as we can tell, the system remains well placed to weather most plausible scenarios. asset quality, capitalisation, risk management capacity and the state of parent banks are all strong. new

this applies especially if an investment product looks complicated. there are many sources of information to assist in making investment decisions, including material published by public agencies such as the office of the retirement commissioner, and by reputable members of the savings and investment industry. there is also the advice of professional experts. naturally, the quality of advice is only as good as the quality of the person giving it, so if an investor chooses to use an investment adviser, the investor would be wise to check the adviser's qualifications and accreditation, experience, track record and independence. checking the provenance of investment products and firms is all the more important in new zealand because regulation of financial investments here is not highly paternalistic. the general approach of the reserve bank act for bank deposits, of the securities act for financial securities, and of legislation for other forms of investment is to promote the proper functioning of the financial system as a whole, and not the performance or soundness of particular institutions. laws relating to the financial system set extensive and tough disclosure requirements, so that individual investors can judge for themselves the risks and returns they are facing and make decisions accordingly. as noted earlier, low and stable inflation supports their ability to do this. investors not prepared to be intensively involved in the day - to - day management of their investments have the option of engaging a professional to manage directly their financial affairs. there are many professional investment management services available. although some professional service arrangements are pitched at those with sizeable sums to invest, there are also management services for those making smaller investments. finally, managed - fund products such as unit trusts offer the smaller investor a combination of reduced risk through diversification, and the portfolio - management services of an investment professional. vigilant and open - eyed investment strategies benefit not only investors. households making wellinformed investment and borrowing decisions are better able to cope with rainy days, and better prepared for their retirement years. soundness in the household sector undergirds the stability of the financial system, and of the economy as a whole. finally, intelligent scrutiny of investment proposals, including the creditworthiness of financial companies, crucially helps weed out poor performers and improve good performers, promoting effective resource allocation and growth across the economy. for all these reasons, it is important that investors take all the steps they can to better understand the nature of the risks attached to their investment and borrowing decisions. this includes thinking in terms of real rates of return, rather than nominal rates. if we - each of