Banking soundness and the role of the market is a subject of particular relevance to New Zealand, given its adoption of a banking supervision approach that places considerable emphasis on the role of the market in promoting a sound financial system. Initially formalized in 1987, New Zealand’s approach to banking supervision was relatively orthodox between 1987 and the end of 1995. It involved minimum capital requirements (based on the Basle Accord); limits on the amount that banks could lend to individual customers and related parties; a limit on banks’ open foreign exchange positions; off-site monitoring of banks, using information provided privately to the central bank, the Reserve Bank of New Zealand; annual consultations with the senior management of banks; and a range of powers to enable the Reserve Bank to respond to bank distress or failure.