in australia, however, this has not happened ; in particular, household loan arrears remain relatively low ( graph 3 ). contributing to this better outcome in australia was the fact that the deterioration in lending standards was not as severe or as widespread as in some other countries. also, household incomes have continued to grow solidly, in the context of a strong economy and low unemployment. bis central bankers ’ speeches graph 3 banks ’ non - performing housing loans * per cent of outstandings however, within this overall picture of resilience, there are, as always, pockets of housing stress. in the early part of last decade, those pockets were heavily concentrated around the south - west parts of sydney. these problems followed the very strong rises in sydney house prices over 2002 and 2003. they were linked to a sharp rise in loan approvals, some lowering of lending standards, particularly by second - tier lenders, and increased speculative activity. conditions in that region subsequently improved, helped by a period of stable house prices and rising incomes, though the process took a long time and the arrears rate in that part of sydney remains higher than the national average. recently, it has been parts of queensland and western australia that have shown a deterioration in loan arrears, albeit from low levels. as had been the case in sydney earlier in the decade, the recent increase in loan arrears in these states followed a sharp increase in housing loans and unusually strong rises in house prices between 2006 and 2008. some part of this was justified by the emerging resources boom but, as had occurred earlier in sydney, this was accompanied by some lowering of credit standards and increased speculative activity, with the result that some households over - extended themselves. adding to the stress on household finances was the fact that both these states experienced largerthan - average increases in unemployment during the 2009 downturn, though again from relatively low levels. another potential source of vulnerability in the housing market that is often mentioned is the many first - home owners who were attracted into the housing market in 2009 by the increase in the first - home owner grant. the concern is that some of these may have over - committed themselves financially in order to enter the market, and are now vulnerable to rising interest rates. this group bears close watching but, so far at least, first - home owners do not seem to be disproportionately represented in loan arrears. while the household sector as a whole continues to show a good deal of res

expand, albeit slowly, since the crisis ( graph 7 ). bis central bankers ’ speeches graph 7 business credit by borrower january 2006 = 100 it is not unusual for business credit to be subdued for a time following a period of strong expansion. both supply and demand usually contribute to this. for instance, businesses often look to repay debt, to repair balance sheets that had become stretched during a boom. also lenders that expand strongly during a boom often end up making significant amounts of bad loans, and when this becomes apparent they respond by cutting back on new lending. normally, periods of soft business credit are accompanied by soft business investment. what is somewhat unusual about the current softness in business credit is that it is occurring at a time when business investment is at a very high level. this unusual conjuncture arises largely from the fact that the strength of investment at present is concentrated in the resources sector, and is being funded mainly by the large amounts of cash that resource companies are generating from existing operations. as a result, despite the very high levels of investment, there has not been the need to resort to substantial borrowing ( graph 8 ). graph 8 business funding quarterly flow bis central bankers ’ speeches there are signs, however, that the low point in business credit growth is now behind us. substantial repair has taken place in business balance sheets since the crisis, business investment is picking up and the banking system is showing greater willingness to lend. on average, recent monthly figures for business credit have been somewhat stronger than earlier in the year. it would be normal for this pick - up to continue over the next couple of years as the economic recovery strengthens and broadens. implications for bank funding what do recent developments mean for bank funding? during the period of rapid credit growth that began in the mid 1990s, bank balance sheets expanded rapidly. at the same time, deposit growth slowed noticeably, both because of the decline in national saving and a shift in household saving towards securities rather than deposits. with aggregate credit growing by 12½ per cent per year on average and deposits growing by 10½ per cent per year, banks were left with a noticeable funding gap, which they filled by borrowing in wholesale markets, including from offshore ( graph 9 ). graph 9 funding composition of banks in australia * per cent of funding this funding model was well suited to the market conditions of the time. banks had little difficulty in raising funds in wholesale markets, due to the weight of money seeking investments in australia. in fact, it could