alan bollard : bank regulation and supervision in new zealand - recent and ongoing developments address by dr alan bollard, governor of the reserve bank of new zealand, to the australasian institute of banking and finance, sydney, 23 march 2005. * * * vigilance and reinvigoration the new zealand economy has experienced a very good period of growth over the last ten or so years, averaging 3. 4 per cent gdp growth per annum. in the last five years, with growth averaging 3. 8 per cent per annum, new zealand has been one of the fastest growing economies in the oecd even ahead of australia. new zealand's unemployment rate is now at a multi year low of 3. 6 per cent. the banking sector has played a significant role in this economic growth, being the main intermediator of peoples'savings into investment and gateway for foreign investment funds. at around 74 per cent, banks account for the lion's share of financial system assets in new zealand. in comparison, banks account for about 50 per cent of financial system assets in australia. bank balance sheet growth has been exceptional for several years, dominated by lending to households. what is pleasing to date is that the soundness of the banking sector has also remained intact. banks are experiencing a period of very low loan default and strong profitability. however, it should never be forgotten that despite our impressive growth, new zealand remains a small, open, and indebted economy. we have also been benefiting from a strong terms of trade upswing, and a structural rise in households'debt appetite, neither of which will be sustained forever. the potential vulnerabilities of our economy are reflected in the banking sector. over half of new zealand's foreign borrowings are sitting on banks'balance sheets, with new zealand's private sector relative indebtedness the highest in the oecd. 1 what's more, our banking sector displays amongst the highest levels of foreign ownership in the world - foreign banks own 98 per cent of new zealand banking system assets, with 85 per cent being australian - owned. despite the benefits that foreign ownership and capital bring, these features mean that any banking crisis new zealand faces is as likely to be caused by external influences as it is internal. the new zealand financial system is vulnerable to shocks within the banking system ( such as the mismanagement of a local bank ), outside of the banking system ( such as a wider economic

work is underway at the moment for the first meeting of the council, which is scheduled to happen soon. the first key output of the council is to report to ministers in late may on any legislative changes that may be required to ensure apra and rbnz can support each other in the performance of their current regulatory responsibilities at least regulatory cost. there are other significant early gains that could be made for the council over the coming year. for example, we anticipate good progress on the home - host coordinated implementation of basel ii that i outlined in the terms of engagement earlier. we also think good progress can be made on gaining a clearer understanding of trans - tasman bank failure management strategies and coordination. we look forward to building the trans - tasman regulatory community based on the principles of cooperation and harmonisation. but, we will also work diligently to continue developing the capacity to preserve new zealand's systemic financial interests. conclusion overall, the strong presence of foreign banks has brought many benefits to new zealand in terms of soundness and efficiency. it has enhanced risk management capacity within the banking system, facilitated the entry of new banking products and services, and reduced the financial system's vulnerability to domestic economic shocks. however, along with the many benefits it brings, having an open, foreign - owned banking system also increases the chances of our financial system being adversely impacted by off - shore developments. the reserve bank of new zealand is developing and maintaining the ability to deal with troubled banks in a way that is fiscally responsible, and that causes minimal disruption to real activity. we are also actively engaging with our trans - tasman counterparts, and are optimistic about the opportunities the trans - tasman council and further harmonisation might offer.