to acquire us dollars at any price, as some other banks may be. another important feature of this offshore funding, as i will address in detail in a moment, is that the banks are not exposed to exchange rate risks as they hedge their borrowings denominated in foreign currencies. independence – it's an australian dollar thing as you are well aware, the us federal reserve has been raising its policy rate in recent years, and interest rates in the united states are now higher than in australia. these developments reflect differences in spare capacity and inflation : unemployment in the united states is at very low levels, inflation is at the fed's target and inflationary pressures appear to be building. since august 2016 – the last time the reserve bank changed its cash rate target – the federal reserve has raised its https : / / www. rba. gov. au / speeches / 2018 / sp - ag - 2018 - 12 - 10. html 2 / 10 12 / 10 / 2018 us monetary policy and australian financial conditions | speeches | rba policy rate seven times, by 175 basis points in total ( graph 2 ). yet while australian banks raise around 15 per cent of their funding in us dollars, interest rates paid by australian borrowers since then have been little changed. graph 2 how is it that interest rates for australian borrowers have been so stable, despite australian banks having borrowed some us $ 500 billion in the us capital markets, in us dollars, paying us dollar interest rates? the answer lies in the hedging practices of the australian financial sector. as i'll demonstrate, australian banks use hedging markets to convert their us interest rate obligations into australian ones. the australian banks fund their australian dollar assets via a number of different sources. some of their funds are obtained in us dollars from us wholesale markets. in order to extend these usd funds to australian residents, they convert the us dollars they have borrowed into australian dollars soon after the securities are issued in the us. on the surface it would appear that such transactions could give rise to substantial foreign exchange and interest rate risks for australian banks given that : 1. the banks must repay the principal amount of the security at maturity in us dollars. so an appreciation of the us dollar increases the cost of repaying the loan in australian dollar terms ; and https : / / www. rba. gov. au / speeches / 2018 / sp - ag - 2018 - 12 - 10. html 3 / 10 12 / 10 / 2018

. 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