been slower than the growth in deposits for the first time the early 1990s ( graph 10 ). graph 10 as mentioned earlier, part of the explanation for the strong growth in deposits is the increased competition for deposits in the banking system. but another part of the explanation reflects the changed nature of the financial flows in the economy. while parts of the corporate sector may be less reliant on the domestic banking system for their funding, ultimately a large part of the funding they raise from other sources still finds its way into the domestic banking system in the form of corporate deposits. hence, if the economy evolves as forecast, it ’ s quite possible this pattern of deposit growth outstripping credit growth continues and deposits may continue to rise as a share of bank funding. bank funding and capital flows these changes in bank funding, as well as in the funding of the increase in capital expenditure, are apparent in the financial accounts side of the balance of payments. these are the capital inflows that are the counterpart of the current account deficit. the net capital inflow into australia masks very large gross capital flows both into and out of the country. for example, over the past five years, the average annual net capital inflow amounted to $ 55 billion. this net capital inflow comprised : foreign investment in australian equity of $ 54 billion ; australian investment in foreign equity of $ 51 billion ; foreign investment in australian debt of $ 95 billion ; and australian investment in foreign debt instruments of $ 43 billion. given the size of these gross flows, it can be somewhat misleading to analyse shifts in capital flows or how the current account deficit is funded by focusing on net flows only. for a number of years prior to 2007, australian banks were a steady source of capital inflow, representing around 4 per cent of gdp, or around 80 per cent of net private sector inflow ( graph 11 ). these capital inflows reflected the fact that australian banks found it cost effective to raise wholesale funds offshore to fund domestic asset growth. that these net flows into the banking sector were similar in size to the current account was as much coincidence as causation in my opinion. graph 11 given the changes to bank funding and the slowdown in the credit growth discussed above, financial inflows in the form of offshore debt raisings by australian financial institutions have declined. in the first three quarters of 2010, the net inflow of foreign funding to banks was only 1 per cent of gdp. all of this occurred in the

first quarter of the year, with the net amount of offshore funding by the banking sector amounting to zero in the two most recent quarters. at the same time, the current account deficit has fallen to around 2½ per cent of gdp. going forward, the forecast rise in the investment share of the economy is likely to see an increase in capital inflows. as discussed above, given that mining companies are likely to rely less on locally intermediated debt to fund their activities, there are likely to be further changes in the composition of net private capital inflows away from banks towards nonfinancial corporates. some of this might be in the form of increased direct debt raisings, some might be in the form of an increase in retained earnings. so the current account deficit may increase from its current level, but on the capital account side, there may not be a concomitant increase in banks ’ net offshore raisings. conclusion the financial crisis has had a marked impact on financial flows globally. in this speech i have described some of the effects it has had on financial flows in the australian economy. the funding of the australian banking system has changed quite markedly as has the cost of that funding. in addition, the forecast composition of growth in the australian economy and the funding of that growth may have implications for the asset side of the banking system ’ s balance sheet. it is quite possible that intermediated credit growth will be slower, and deposit growth relatively higher, than has been the case in recent years. these changes have been, and may continue to be, reflected in the changed composition of capital flows to the australian economy.