of government ’ s economic and social objectives. on the other hand, it must be acknowledged that the government ’ s determination to run fiscal surpluses throughout the cycle, and to achieve further reductions in net public sector debt, has been one of the important reasons why foreign investors have been willing to finance new zealanders ’ insatiable appetite for borrowing in recent years. should there be no government fiscal response to the present situation, and should a fiscal deficit subsequently emerge, the confidence of foreign investors could be somewhat undermined - with resultant upward pressure on interest rates and downward pressure on the exchange rate. last week, the government statistician announced that the gross overseas debt of new zealand banks and corporates had risen by $ 20. 1 billion during the year to 31 march 1998, to reach a total of $ 79. 0 billion. of this increase, it was stated that $ 6. 2 billion was on account of the increase in the new zealand dollar value of foreign currency debt. it was also noted, however, that the figures took no account of ‘ hedging or other financial derivatives used by companies to offset potential foreign currency risk. ’ the significance of this note has almost certainly been missed by many commentators, because it is quite clear that all banks, and i suspect most corporates, hedge their foreign - currency denominated liabilities in full or in substantial part. certainly at 31 march 1998, the four largest banks, which have been heavy borrowers of foreign funds in recent years, carried almost no foreign exchange risk on that borrowing. this means that the increase in the new zealand dollar equivalent of the gross overseas liabilities of the banking system as a result of the depreciation in the new zealand dollar, included in the debt figures published by the government statistician, will have been almost exactly matched by gains on the banks ’ currency hedges. the press, 23 june 1998. moreover, in recent years it has been possible to argue that new zealand ’ s balance of payments deficit has been a result of investment exceeding saving in the private sector ; the public sector was more than funding its own investment activities through its operating surplus. in 1998 / 99, the budgeted operating surplus looks likely to be broadly similar to public sector investment. if the operating surplus turns out to be less than now budgeted, perhaps because economic growth turns out to be slower than projected, it is possible that public sector investment will exceed the operating surplus. in other words, if the operating surplus turns out

’ s important also that small and large countries alike understand each other ’ s needs. these needs include meeting national sovereignty objectives and adapting bis central bankers ’ speeches the regulatory response to local conditions, while also meeting the spirit and desired outcomes of the basel iii standards. small open economies differ from their larger counterparts in several respects : • their economies are often less diversified and are more vulnerable to external shocks ; • a large portion of their banking system may be foreign owned and regulated by home and host supervisors. their shadow banking sector is usually smaller and less developed than in the larger economies ; • they tend to have less sophisticated financial market infrastructures, with limited or no opportunities for local central clearing ; • credit risk is often concentrated in just a few sectors ; • bank balance sheets are less complex, with a predominance of vanilla banking rather than investment banking ; and • there can be a shortage of highly - rated liquid assets, especially when governments run budget surpluses or small deficits, and where equity and corporate bond markets are small and lack liquidity. these differences can affect the way small countries choose to implement global standards. when there ’ s symmetry between financial market practices, small country regulators usually seek to align practices to global standards, so as to minimise the cost for banking groups operating across jurisdictions. when symmetries aren ’ t apparent, regulators in small economies seek to use the flexibility in global standards to adapt to local conditions. for some small countries, parts of the global standards have limited relevance or relate to low areas of risk, so their adoption may not be a priority. for new zealand, shadow banking comes into this area – it ’ s a small sector, which we assess to be low risk. in other cases the alignment of global standards is influenced more by home regulator rules or market imperatives. for instance, requirements for central clearing and trade reporting of otc derivatives may be imposed by the home regulator, or by counterparties, independent of any host supervisor requirement. before concluding, let me make a few brief comments about new zealand ’ s approach. as a financial regulator, the reserve bank of new zealand generally seeks to align with international standards, but uses national discretion to adjust for local conditions as needed. where we make adjustments we seek to achieve regulatory consistency, mindful also that our approach is : • to foster market discipline by stressing self discipline by banks in managing risks, and • to avoid supervisory practices that might erode market discipline or weaken the incentives for a bank