, however, measures of confidence have improved despite the escalating problems in europe and the continuing volatility in share prices, suggesting that other factors are providing an offset. the changed picture for interest rates is one of these. however, the continuing solid expansion in household disposable income, which has risen by about 7 per cent over the past year, has no doubt also been important. measures of business confidence are a little below average at present, even though business conditions are around average levels. conditions are weakest in the retail, manufacturing and construction sectors and are noticeably weaker among smaller businesses than among larger businesses. overall, however, business confidence, like household confidence, has improved in recent months. the gradual spread of the benefits of the resource boom is helping to sustain business confidence in the face of the worsening european situation. the key drivers of wealth are changes in share prices, house prices and deposits. share prices are down by 10 per cent over 2011, though a significant part of this has been offset by higher dividend payments. house prices on average are down by 4 per cent in 2011. on the other hand, deposits have risen strongly and overall household wealth has fallen by a relatively modest 2 per cent in 2011 ( graph 14 ). this is a much smaller decline than occurred following the global financial crisis in 2008, and has not caused households to respond by sharply raising their rate of saving, as happened on that earlier occasion. this has allowed household spending to grow broadly in line with income. graph 14 bis central bankers ’ speeches conclusion the sovereign debt problems in europe have escalated over recent months and an unfavourable feedback loop has developed between government debt, the banking sector and the economy. the large size of the euro - area economy and the significant role played by european banks in global cross - border banking mean that it is inevitable that there will be spillovers to other parts of the global economy, including australia. nonetheless, it is encouraging that, to date, any impact on the us economy has been more than offset by other factors, with recent us economic indicators being better than they were around mid year, despite the recent escalation of the european crisis. the same is also true in australia. asian economies have slowed, but it is not clear how much of this is due to earlier policy tightening within asia ( which in some cases is now being reversed as inflation pressures subside ) or the effect of the developments in europe. the situation is still unfolding, however

funds, which they use to fund us dollar assets, including trade finance. lending to euro - area banks by us money market funds has fallen by 55 per cent this past year. in response, banks have turned to foreign exchange swap markets to source us dollars, pushing up the cost significantly ( graph 9 ). graph 9 to alleviate the shortage of us dollar funds among european banks, the us federal reserve has re - activated its us dollar swap lines with a number of other central banks. this is to allow these central banks to lend us dollars to banks in their jurisdiction. until recently, however, banks had not made much use of this facility, instead seeking to reduce their need for us dollars by selling us dollar assets and cutting back on cross - border financing. following the recent reduction in the interest charged on the facility, however, usage has picked up somewhat. to try to enhance investor confidence, european banking authorities recently announced a requirement for a large number of euro - area banks to lift their core tier 1 capital ratios to 9 per cent by mid 2012. 1 it has been estimated that, other things equal, this would require about €115 billion of new capital. this is not a particularly large amount, being equivalent to about 12 per cent of these banks ’ current capital. nonetheless, there is evidence that at least some banks are unwilling or unable to raise equity and are seeking to achieve the higher capital ratio by reducing assets, particularly in offshore markets. this will add to the general tightening of global credit conditions. euro - area banks are large participants in cross - border lending, though this is mainly oriented towards other european countries and north america ( graph 10 ). their role in the asian region is smaller, though they are thought to play a significant role in trade financing. while no data are available for the recent months during which the european banking problems have escalated, anecdotal evidence suggests that a lack of trade financing is not as significant a problem in asia as it was in 2008. after including a buffer for valuation losses on their sovereign debt exposures. bis central bankers ’ speeches graph 10 australia ’ s exposure to european developments there are various channels through which developments in europe could affect australia. these include financial linkages, trade linkages and confidence and wealth effects. ( a ) financial linkages the direct exposures of australian banks to the euro area are small. their claims on euroarea countries amount to $ 87 billion, or 2. 7 per cent of total assets. moreover,