place for longer than usual, while also wishing to stimulate the economy. an important issue for consideration is thus how the reserve bank might choose to implement macro - prudential policy in the future. the process would begin by establishing that asset market imbalances had become exceptional and unsustainable − as reflected in asset prices and / or excessive credit. then we would determine whether this was likely to contribute to macro imbalances in the future, which warranted policy action to bolster financial sector resilience and / or moderate the credit cycle. we are continuing to work on developing a set of indicators to help identify the build - up of financial imbalances, but, in practice, there will need to be a degree of judgment in assessing whether a macro - prudential overlay is warranted based on the bank ’ s financial stability objective. next, we would assess whether a macro - prudential overlay would support monetary policy, or at least not work against it. the nature of the imbalances would then guide the selection of the appropriate tool. generalised credit growth and broadly - based accumulation of banking system risk would prompt consideration of tools that are broad - brush in effect, such as the core funding ratio, or an aggregate capital buffer. pressures emanating specifically from housing or other sectors could suggest more targeted tools such as loan - to - value restrictions or adjustments to risk weights for the implicated sectors. turning to governance structures, there is no consensus in the literature whether monetary policy and prudential regulation and supervision should be combined in a central bank, or undertaken by separate institutions. a strong case can be made that central banks are best placed to be macro - prudential regulators and that centralising responsibilities within the central bank helps to avoid problems of coordination. certainly, this appears to be the trend internationally following the crisis. our own experience is that dealing with these policy overlaps is assisted by having a small “ full - service ” central bank managing monetary policy and prudential policy across all its dimensions. nevertheless, the coordination of these functions can still pose challenges and good internal process is important. see spencer, g ( 2010 ) for further discussion of the reserve bank ’ s macro - financial stability role. bis central bankers ’ speeches we established a macro - financial committee in 2009 for the internal consideration of macrofinancial issues and policies. this complements the reserve bank ’ s monetary policy and financial system oversight committees, which consider monetary policy and micro

##prudential policies respectively. the macro - financial committee currently reviews indicators of financial stability, oversees production of the bank ’ s financial stability reports, and analyses potential new macro - prudential policy tools. if and when new macro - prudential policies are implemented, these will be reviewed and recommended to the governor by the macro - financial committee. the implications of such recommendations for micro - prudential policy and for monetary policy will be considered by the governor and potentially referred to the other policy committees. we also regularly consult with the treasury and minister of finance to keep them abreast of prudential policy developments and to glean their views. the financial stability report, which is a legal requirement under our act, requires us to explain and justify the prudential policies we adopt. conclusion micro - prudential and macro - prudential policies are both important. good micro - prudential regulation should contribute to financial system stability and we need to remain focused on improving the regulation of individual financial institutions. however, we have learned that this might not be enough to contain system - wide risks. macro - prudential instruments that focus on system - wide imbalances can also bolster financial system resilience and possibly help to moderate credit cycles. we need to be realistic about what can be achieved. even if credit cycles can be moderated, they will not be eliminated. like other countries, new zealand has already taken steps to promote a more resilient financial system with our liquidity policy helping to shift the banking system on to a more stable funding base. in terms of using macro - prudential instruments to better manage the credit cycle, there has not been a pressing need for the use of such tools given recent weakness in the credit cycle. however, we do need to keep preparing for how we might deal with credit and asset price booms when they recur in the future. our work so far on macroprudential instruments suggests that we should keep our expectations modest, but we have identified several tools that we would contemplate using in the right circumstances. the world has little practical experience with some of the macro - prudential tools currently under consideration. there will be an important learning period ahead as countries start to use these instruments and develop their implementation frameworks. we can expect our understanding of this broad area to have evolved significantly in five or ten years ’ time. references blanchard, o, g dell ’ ariccia and p mauro (