rapidly, with most business borrowers still connecting with savers over the balance sheets of financial institutions. some of these commentators have also lamented the fact that superannuation funds – who they see as a natural buyer of corporate bonds – seem to have had only a limited appetite for these bonds. see financial system inquiry ( 1997 ), financial system inquiry final report ( s wallis, chairperson ), australian government publishing service, canberra, p 159. bis central bankers ’ speeches given this background, i thought it would be useful to briefly discuss recent developments in the australian non - financial corporate bond market as well as the role that superannuation funds have come to play in intermediating between borrowers and savers. i would then like to discuss the role that market - based corporate financing can play in providing a form of insurance against stresses in the banking system and the possibility of a lack of competition in the banking system. the australian corporate bond market by international standards, the australian corporate sector makes relatively little use of the bond market, especially the domestic bond market. since the mid 2000s, the available internationally comparable data suggest that average annual bond issuance by australian corporations has been the equivalent of just under 1 per cent of gdp, with around two - thirds of total issuance taking place offshore, rather than in the domestic market ( graph 1 ). in most other countries with which we normally like to compare our financial markets, the corporate sector makes greater use of bond funding. graph 1 the relatively high reliance of australian issuers on the offshore market is evident in the data on the composition of corporate bonds outstanding ( graph 2 ). currently, bonds that were issued offshore account for around 80 per cent of the outstanding value of bonds issued by australian - based corporations. a decade ago, this figure was considerably lower at around 50 per cent. the offshore market is favoured by companies that want to raise foreign currency funding as a natural hedge against their foreign currency revenue. it has also proven easier to issue large amounts and at longer tenors in the offshore market than it has in the domestic market. bis central bankers ’ speeches graph 2 another perspective on recent trends can be gained from looking at the data on the number and credit ratings of the individual bonds that have been issued domestically and offshore ( graph 3 ). graph 3 bis central bankers ’ speeches a number of observations stand out : 1. the number of australian companies issuing bonds is quite small. on average, over recent times, only around 30 bonds have been issued in

the more nebulous concept of “ confidence ”, at times, dominates the fundamentals. “ in a matter of just a few months, the asian economies went from being the darlings of the investment community to being virtual pariahs. there was a touch of the absurd in the unfolding drama, as international money managers harshly castigated the very same asian governments they were praising just months before. … but, as often happens in financial markets, euphoria turned to panic without missing a beat. suddenly, asia ’ s leaders could do no right. the money fled. ” 12 this is not, of course, the first time this has happened. alan greenspan, describing this reaction in capital flows as “ a visceral, engulfing, fear ”, went on to say “ the exchange rate changes appear the consequences, not of the accumulation of new knowledge of a deterioration in fundamentals, but of its opposite : the onset of uncertainties that destroy previous understandings of the way the world works. that has induced massive disengagements of investors and declines in asian currencies that have no tie to reality. in all aspects of life, when confronted with uncertainty, people tend to withdraw. … at one point the economic system appears stable, the next it behaves as though a dam has reached a breaking point, and water ( read, confidence ) evacuates its reservoir. the united states experienced such a sudden change with the decline in stock prices of more than 20 per cent on october 19, 1987. there is no credible scenario that can readily explain so abrupt a change in the fundamentals of long - term valuation on that one day. such market panic does not appear to reflect a simple continuum from the immediately previous period. ” krugman ( 1998a ) has suggested a possible reason for this big shift in confidence. foreign investors thought they were working in a riskless world, and made their investment decisions accordingly. then, quite suddenly, they realised the risk, and underwent a fundamental adjustment in expectations. this explanation has some attractions but does not seem to fit the overall reality closely. there were not too many explicit guarantees around, leaving aside bank sachs ( 1997 ). and sovereign debt ( which remained guaranteed ), so there was not a rational reason for re - evaluation. the more intuitively appealing explanation ( at least to me ) is that investors simply changed their minds. they had not known much about the countries ( or projects ) they invested