relevant to the arguments i have presented thus far, the basel standards also make determinations around the quality of assets that can be held. the basel guidelines focus primarily on government debt as the liquid asset. that is clearly not possible in australia, given the prudence of governments over a long run of years. the amount of government debt that the australian banking system would need to hold to meet the liquidity standard is in excess of the stock on issue. moreover, if the banks were to hold the stock on issue, the government bond market would no longer retain any liquidity, which would be completely self - defeating. hence it was announced late last year that the rba would provide a committed liquidity facility to meet the shortfall between banks'holdings of government paper and their total liquidity needs. the banks will be charged an ongoing fee to be able to access the facility, the size of which is still under consideration. the eligible assets for the facility are those currently eligible for the reserve bank's market operations. funding and assets of the australian banking system having talked thus far about the fundamental importance of collateral quality in determining solvency and in determining liquidity provision, i will now spend the remainder of my address talking briefly about recent developments in the asset and liability structure of the australian banking system. on the asset side, the most marked development has been the slowing in aggregate credit growth. lending for housing has slowed from the double digit pace of the two decades until 2007 to its current pace of around 5 – 6 per cent. this is noticeably slower than growth in household income, which was over 8 per cent in the year to march. for those who like to agonise about debt to income ratios, which i personally don't, this implies a marked change in that dynamic. on the corporate side of banks'assets, growth has been very subdued reflecting a number of different dynamics. the large investment boom currently underway is being financed in quite a different way from growth episodes in the past. companies in that sector are funding themselves from cash or directly from global financial markets. hence the domestic banking system is seeing much less of that business than in the past. to put it another way, intermediated business credit is likely to grow a lot slower in the period ahead than historical relationships with gdp and investment would lead one to believe. finally, lending conditions to the commercial property sector remain tight as banks are still reluctant to increase their exposure to that sector. the changes in funding structure of the banking system

institutions are now in a funding - driven world. they can no longer assume that the funding will be readily forthcoming at a given price. we are now much more in a liability - driven world. so the structure and maturity profile of liabilities does bear close analysis. because banks are in the business of maturity transformation, liabilities mature at a faster pace than assets. assets can be difficult to liquefy in the market, particularly in stressed circumstances. as a result, a bank generally meets the need to repay its liabilities as they fall due by issuing more debt. but the bank's ability to refinance its maturing liabilities still fundamentally depends on the asset portfolio. an investor's decision as to whether it will be willing to lend to the institution will be based on its credit assessment of the institution's assets. if there are doubts about the quality of that asset portfolio, a bank will find it considerably more difficult to obtain more funding. bis central bankers ’ speeches liquidity1 i will now focus more directly on the important relationship between asset quality and liquidity. if a bank is experiencing a problem of illiquidity, the state of its asset portfolio is even more paramount. this relates to one of the fundamental tenets of central banking, most famously associated with walter bagehot. writing in lombard street in 1873, bagehot states that central banks should lend freely ( ie, liberally ) at a high rate to solvent but illiquid banks that have good collateral. there are a number of important elements to bagehot's statement which i am going to discuss in some detail. starting at the end of the statement, and germane to the argument thus far, is that the bank must have good collateral. therefore, critically, it is the asset side of the balance sheet which enables the bank to overcome a problem on the liabilities side : the central bank must be sure that it is lending against good collateral. the second aspect of the statement which bears further discussion is that the central bank should lend to solvent but illiquid banks. i don't see this as being materially separable from the collateral issue. as i have argued above, a bank's solvency is most strongly influenced by the quality of its collateral. capital and leverage play an important role too. it is sometimes said that it might be difficult to determine whether the issue really is one of solvency rather than one of liquidity. clearly, the fact that