unrealistic to expect impaired assets to stay as low as they are now. credit quality necessarily ebbs and flows with the fortunes of the economy and particular sectors. what is important is that any deterioration is manageable against banks ’ capital, and that they recognise early the need for additional provisions. on balance, we believe that some current lending practices do risk sowing the seeds of future credit quality problems for banks. chief executives and boards should be considering carefully whether the additional point of market share that might be won now by lending to marginal propositions is worth the pain of future losses, the resources needed for loan workouts, and so on. they should also be alert to the possibility that the household sector might feature more strongly in the next upswing of losses. household debt has increased a good deal more quickly than incomes in recent years. the rba recently organised a credit conference to review trends in credit risk management, with participants including a number of leading bankers and accountants. a volume of readings and a summary of discussion will be published soon. the main theme from the conference was how credit risk assessment and management are becoming more objective, more scientific. one speaker described this as moving from an “ experience - centric ” approach to “ data - centric ” models. with standard products such as mortgages, consumer loans, credit cards and ( to some extent ) small business loans, quite sophisticated statistical methods are beginning to be applied to estimating default risk. the aim is to see, from an analysis of history, which data are most helpful in predicting the probability of default. such analysis produces “ scorecards ” for use in processing loan requests. increasingly, consumer loans are being managed on a portfolio basis, with banks calculating expected losses for various broad product categories. some are tracking the migration of loans through various stages of delinquency to help determine the proportion which will ultimately incur a loss. by updating the amounts at each stage, and adjusting migration rates in the light of current information, banks aim to measure more accurately the current risks in their portfolios. at the “ bigger ” end of the loan market, a lot of attention is being given to the accuracy and timeliness of risk - grading systems. to grade loans, the more sophisticated banks are now using complex statistical models based on financial information about borrowers or on equity prices. these feed into decisions about pricing, provisioning and portfolio balance. securitisation, the development of secondary markets and the use of credit derivatives

“ going live ”, more thought is being given to its practical implications for banks and their customers. perhaps the most important of these is the daily management of liquidity. with payments able to flow across banks ’ settlement accounts at the rba only if the paying bank has sufficient funds, liquidity will clearly become more of an issue than it is now - when a bank needs only enough funds to extinguish any net obligation to others each morning. under rtgs, banks will need to manage their liquidity more carefully or run the risk of being unable to send an important payment at the required time. banks are starting to give attention to this task - studying the patterns in their payment flows and upgrading their systems so they can monitor and manage flows on an aggregate basis across their business. there will inevitably be implications for corporates in this. rtgs will cause banks to focus more sharply on the amount of credit extended to customers during the day. because they will have to manage their own liquidity more closely on a real - time basis, banks will ( understandably ) want to control their customer exposures, and the demands which these place on liquidity, more tightly than before. payment requests will have priorities attached. corporates may need to negotiate facilities to ensure that time - critical payments will flow when they are expected by suppliers and counterparties. as a result, some will no doubt choose to plan their payments and receipts more actively than in the past. our impression from recent discussions with corporate treasurers is that very few, if any, banks have yet done much talking to their customers about these issues. more careful management of liquidity by banks and their customers will reduce the likelihood of payments “ gridlock ” under rtgs. for its part, the rba has taken various decisions aimed at ensuring adequate liquidity will be available, at a reasonable cost, across the system as a whole. we will enter into securities repurchase agreements with banks to provide them with intra - day funds at virtually no cost. we will allow banks to dip into their par assets for such transactions. the range of assets eligible for repos with the rba has also just been expanded. finally, as banker to the commonwealth, we will use our control over government payments to inject funds early in the day. it remains to be seen whether other devices will be needed to lubricate the system. in some places, such as the united kingdom and hong kong, banks are required to send a minimum