New Zealand escaped major damage in the worst global financial crisis in decades, but imbalances and vulnerabilities were highlighted, the Reserve Bank's 2008/09 annual report says.

"Prior to the crisis, households had been consuming beyond their incomes, borrowing heavily offshore through their banks," Reserve Bank Governor Alan Bollard said releasing the report today.

"In the past two years there has been a substantial correction in household savings and the external payments imbalance. However, further improvements will be needed to stop our international debt position from mounting further."

The recent rise by the New Zealand dollar had not supported the shift towards the export and import-competing industries that would be necessary to improve the situation, said Bollard.

"On these trends, there is a real risk that recent improvements in the external balance will be reversed."

The report noted the Reserve Bank had been able to integrate its policy tools across monetary policy, financial stability and prudential supervision in response to the financial crisis.

Among the range of policy measures implemented was "the fastest and furthest fall in the OCR (official cash rate) on record", Bollard said.

Steps were also taken to ensure banks could obtain funding by allowing them to borrow from the Reserve Bank, using a broader range of facilities and collateral.

International regulators were now likely to require better tools to regulate financial systems over the economic cycle, including stronger liquidity and capital adequacy standards.

The Reserve Bank would assess those developments in the New Zealand context as they emerged, said Bollard.

In the meantime the Reserve Bank had introduced a new prudential liquidity policy for banks which aimed to address the main vulnerability of the New Zealand system that was exposed during the crisis.

Progress was also well under way to implement a new prudential regime for non-bank deposit takers, in the wake of considerable weakness in the non-bank sector over recent years.

The Reserve Bank's crisis liquidity measures and earlier foreign exchange intervention carried risks to its balance sheet that continued to require careful management.

Its total assets expanded over the year to June 30 2009 by about $6 billion, to reach $31b. The Reserve Bank's equity at June 30 was $3b.

Significant reductions in interest rates and exchange rates in the 2008/09 financial year meant the Reserve Bank recorded a net profit of $906 million and paid a dividend of $630m to the Government, Bollard said.

"This is a strong financial result which reflects abnormally large changes in market conditions."

He warned that the Reserve Bank's future financial performance could be expected to be more volatile than it had been in recent years.

In recognition of the seriousness of the financial crisis Bollard, deputy governor Grant Spencer, and assistant governors Don Abel and John McDermott requested they be given no remuneration increase in calendar year 2009.