mr. brash looks at the implications of the global financial marketplace for new zealand address by the governor of the reserve bank of new zealand, dr. donald brash, to the single financial services market conference in wellington, on 19 / 11 / 97. introduction it ’ s a great pleasure to be here today to share some thoughts with you on the global financial marketplace, and its implications for new zealand. we have recently had a dramatic example of how events in one country can spread rapidly. the recent share market collapse that began in hong kong and spread to equity markets around the world, including new zealand, illustrates just how integrated global financial markets have become. designing and implementing an effective financial policy in pursuit of national goals, in a world of highly integrated capital markets, is one of the most topical and challenging tasks in central banking today. to keep my presentation today within manageable bounds, and reflecting my professional interest, i will constrain my comments to one of the important functions of a central bank, namely, the preservation of stability in the financial system. our focus at the reserve bank is on promoting the maintenance of a sound and efficient financial system in new zealand. this focus involves establishing a policy environment to counteract the possibility of contagious spread of financial distress, and in particular is aimed at encouraging prudent bank behaviour. i will begin by sketching out some of the key trends in global finance, and will then describe the international regulatory response to these developments. along the way, i will tease out the implications for new zealand, and test our approach to banking supervision against these global developments. i will conclude with some crystal ball gazing. trends in the global financial marketplace let me begin then with some observations on the rapidly changing global financial marketplace. it is now a commonplace that barriers between countries and financial markets, at least in developed countries, have largely disappeared, and this fact, together with new technologies, new financial instruments and new funding techniques, means that financial intermediation is increasingly global. fundamental to this trend has been the way in which advances in computer and communications technology have reduced the costs of cross - border transactions by lowering the costs of collecting and analysing data, undertaking transactions, clearing and settling payments and monitoring financial flows. and the cost reductions have been very dramatic. a recent article in the economist noted that “ the cost of a three - minute telephone call between london and new york has fallen from us $ 300 ( in 1996 dollars ) in 1930 to us $ 1

conceived, as early as the late 1950s, as a response to the costs associated with exchange rate frictions within a single market, which at the beginning was only for agricultural products. already in 1944, in an influential study commissioned by the league of nations, the great economist ragnar nurkse had warned convincingly of the economic losses resulting from currency volatility. tommaso himself later argued in his “ inconsistent quartet ” that free trade, free capital movement, fixed exchange rates and independent monetary policies were ultimately incompatible. and the euro itself has had consequences. some of these were identified early, in particular with respect to fiscal governance. some were fully acknowledged only later, such as the pervasive effects of macroeconomic imbalances. but in both cases, the crisis showed that the cohesion of the union in fact relied on the behaviour of each of its members. this is why i believe that the case for community - level governance does not apply only to fiscal policy, or to the banking union, but also to structural reforms, as i will endeavour to explain. fiscal policies within a monetary union the case for fiscal governance at the community level is well understood, and stems from the negative externalities that unsound public finances in a member state can generate for its neighbours. the crisis not only validated this concern ; it reinforced it, by showing that externalities could be even more pervasive than initially thought. the fiscal soundness of a government is obviously first and foremost in the interest of its own country. countries with excessively stretched public finances can lose the ability to use fiscal policy as a counter - cyclical stabilisation tool. indeed, this ability relies on the government being able to access markets under favourable conditions at the time when it needs to, at the bis central bankers ’ speeches trough of the cycle. as we have seen during the crisis, this cannot be taken for granted when doubts arise about the sustainability of the debt. this would be problematic anywhere but it is more so in a monetary union, as the common monetary policy can only aim at price stability for the euro area as a whole. it cannot cater specifically for asymmetric shocks. in the absence of a federal budget, like we see in the united states, the soundness of government credit everywhere is of paramount importance to counteract regional slumps. if some governments retain the ability to stabilise their economies but others do not, then it becomes more plausible that economic divergence will occur.