. australian residents have found enough non - residents willing to lend them australian dollars and to receive an australian interest rate to extinguish their foreign currency liabilities. as a result, australians are net of foreign currency assets, not borrowers. [ 6 ] collectively, australians have used hedging markets and natural hedges to ( more than ) eliminate their exchangerate exposures associated with raising funds in offshore markets. owners australians'ability to find non - residents willing to assume australian dollar and australian interest rate risks is a reflection of the willingness of non - residents to invest in australian dollar assets. this in turn reflects australia's status as a country that has long had strong and credible institutions, a high credit rating and mature and liquid capital markets. the willingness of these non - resident counterparties to assume these risks via a direct exposure to australia's banking system – sometimes for as long as thirty years – reflects the fact that australia's banks are well - capitalised and maintain high credit ratings. in short, australians have found a source of finance unavailable domestically ( at as reasonable a price ), and non - residents have found an asset that suits their portfolio needs. since there are no free lunches in financial markets, there is the question of the cost for australian banks to cover these arrangements. one part of this cost is known as the basis. https : / / www. rba. gov. au / speeches / 2018 / sp - ag - 2018 - 12 - 10. html 7 / 10 12 / 10 / 2018 us monetary policy and australian financial conditions | speeches | rba an imperfect world some swap counterparties have an inherent reason to enter into swap transactions with australian banks. in other words, such exposures actually help them to manage their own risks. non - residents that issue australian dollar debt – in the so called kangaroo bond market – are a case in point. these issuers raise australian dollars to fund foreign currency assets they hold outside of australia. this makes them natural counterparts to australian banks wanting to hedge their foreign currency exposures. similarly, australian residents invest in offshore assets. to the extent that they want to hedge the associated exchange rate exposures, they too would be natural counterparties for the australian banks. however, it turns out that these natural counterparties do not have sufficient hedging needs to meet all of the australian dollar demands of the australian banks. so in order to induce a sufficient supply of australian dollars into the foreign exchange swap market, australian banks

##isations of risk. in addition to intermediating funds, one can also think of the financial sector intermediating risk. as i ’ ve just said, a financial institution has a wide range of loans on its books. by holding a diverse portfolio of risk, the institution is, in theory, less vulnerable to the realisation of any of those risks. but a financial institution doesn ’ t always hold all the risks on its own books. through channels such as securitisation, a financial institution can also distribute the risk around the financial system to other institutions that are, again at least in theory, better placed to hold that risk. who might be better placed to take on these risks? some possible candidates are pension or superannuation funds and insurance companies that should have long horizons and a diversified portfolio of assets. it is an interesting question as to whether it is better for a bank to pool the risks on its own books or whether it is better for the risk to be off the books of the banks and instead be distributed round the system. if the risks are distributed around the system, the bank making the loan may be less inclined to do the appropriate amount of due diligence, as they are no longer so directly exposed to the consequences. in principle, the entity which buys the risk from the bank should also do an appropriate amount of due diligence. but the experience of the past few years shows that the more chains there are in this process, the more removed the end - holder of the risk is from the originator of the risk and the worse the process of due diligence becomes. on the other hand, if the bank holds too much risk on its balance sheet, and if too many of those risks crystallise, the bank is likely to find that its ability to continue to intermediate funds is severely curtailed. it will cut back on its lending – what ’ s commonly referred to as a credit crunch – worsening the economic environment. there are plenty of examples of this through history, including in the current crisis. so conceivably, risk should be intermediated as much as funds. bis central bankers ’ speeches these considerations are currently at play in the debate over the volcker rule in the united states and the “ ring - fencing ” proposed in the vickers report on the uk banking system. the conclusion reached in both those cases is that it is better to separate the investment banking ( or risk generation ) arm of financial institutions from the commercial