The new financial environment creates some structural and strategic challenges for the global financial industry, Reserve Bank governor Alan Bollard says.
Much-reduced financial engineering and weaker financial institutions were likely to see some retrenchment of some banking activities.
"Also, with very low yields, financial institutions subject to obligations or strong expectations to pay fixed returns, such as pension funds, face pressure to increase holdings of risky assets so they can support these returns.
"A renewed search for yield for these reasons raises the risk of excess investment or bubbles in such lower-quality assets."
In delivering the Sir Leslie Melville Lecture this week at the Australian National University, in Canberra, he said New Zealand and Australia continued to learn valuable lessons from the global financial crisis, despite escaping the turmoil relatively lightly.
The crisis challenged many countries on several fronts. The experience of major financial system convulsions, followed by global recession and the emergence of the euro area sovereign debt crisis, provoked economic researchers and forecasters to reassess what was known and where research should focus, he said.
One lesson from the crisis was the interconnectedness of financial institutions, both domestically and globally.
Lessons were also learnt about how quickly systemic financial stress in major countries could spread and create recessionary conditions worldwide.
"The crisis also challenged financial regulators and monetary and fiscal policy makers who are still working to understand, contain and repair the damage to financial systems to economies and to governments' financial capacity."
New Zealand and Australia escaped the worst of the financial crisis but extraordinary policy action by central banks and governments was needed at various times, Dr Bollard said.
Global spending and investment appeared cautious and seemed likely to remain so, given the overhang of debt from before the crisis.
In advanced economies, deleveraging in the private sector appeared to have started but would take a long time - perhaps a generation, he said.
"Very cautious households are a large part of the story of a slow and fragile recovery. They have been hit hard by sustained labour market weakness and in the US and some other advanced economies, this has been compounded by loss of housing wealth and balance-sheet weakness."
The apparently lower appetite for debt among New Zealand and Australian households was an interesting departure from the recent past, or perhaps a return to the more restrained standards of post-war years, Dr Bollard said.
In New Zealand, it continued, despite an emerging pick-up in housing-market activity. New Zealand household credit growth had traditionally tracked the value of house sales but the relationship had loosened since the crisis.
Household caution was understandable, given the restrained growth outlook and the continued need for external rebalancing. However, it was also consistent with cyclically weak labour and housing markets.
"We have yet to see whether deleveraging will continue as the gradual recovery proceeds, or if households instead revert to pre-crisis behaviour." Business sector balance sheets were generally in better shape currently, than after previous recessions, he said.
The labour market weakness probably meant some shift in the share of national income in favour of capital. A reluctance to invest in the current environment of uncertainty - the Australian mining sector being a notable exception - meant many firms were cash-rich.
Legacy issues of the financial crisis remained to be dealt with, including the still-elevated levels of household debt, Dr Bollard said.
Small open economies were also experiencing spillovers into capital flows and exchange-rate pressures from unconventional monetary policy actions by major central banks. That was problematic for New Zealand.
It was unrealistic to try to reduce the risk of a systemic crisis to zero, he said.
"Part of the strengthening of the financial system overall must therefore include practical preparation for further crises, as well as regulation and supervision with an eye to ensuring that a crisis can be dealt with effectively, should it eventuate."
• Dr Bollard leaves the central bank on September 25. He will be replaced by Graeme Wheeler.
