loans are impaired, compared with around 4 per cent for the major australian banks ( graph 14 ). graph 14 the property sector is vulnerable to changes in the availability of credit because it operates with a relatively high level of gearing and low holdings of cash. gearing of listed real estate companies has risen substantially over the past decade. it used to be the case that the sector had substantially lower gearing than the corporate sector in general, but the run - up in debt, followed by the fall in asset values, resulted in gearing of the sector reaching a peak of over 100 per cent by late 2008, well above the corporate sector average ( graph 15 ). graph 15 similarly, cash holdings of corporations in the real estate sector are low compared with other corporates ( graph 16 ). through the boom years, cash holdings of listed real estate companies fell to less than 2 per cent of assets, compared with 6 – 8 per cent elsewhere in the corporate sector. graph 16 in short, it is difficult not to conclude that the financing of the property sector became overextended during the boom years, and that a period of adjustment was largely unavoidable. in saying this, i don ’ t want to downplay the difficulties that some firms are now experiencing as that adjustment takes place, or the impact it is having on property development. the reserve bank is very much aware of both these issues. but cycles like the one we are going through seem to be endemic to the property sector and raise the question of whether, over the longer term, the financing model of the sector should shift towards more equity and less debt. conclusion let me end, however, on a more positive note by making the observation that the adjustment process has been underway for some time now and substantial progress has been made. the equity raisings that have taken place have made an important contribution to reducing gearing levels, and the run - up in arrears on property loans may be coming to an end. more generally, the expected improvement in the economy over the next couple of years will be reflected in the commercial property market also. i think there are already some signs of this. that in turn should boost lenders ’ willingness to make loans to the sector, though i don ’ t think it would be in anybody ’ s interest to return to the free - flowing credit of a few years ago.

with an original tenor shorter than five months has declined by a total of $ 9. 7 billion ( 8½ per cent ). at the same time, the cost of australian dollars in the forward fx market has been quite elevated. this high price in the forwards market has been due to a number of factors including the tendency of hedge funds to fund their australian dollar shorts in this market, as well as an increase in the use of this market by foreign bank branches to fund australian dollar lending. historically, australian banks have tended to raise a significant share of their short - term funding in foreign markets, mostly in us dollars, and then swap them back into australian dollars to fund their australian dollar - denominated asset base. they would swap these foreign currency funds when the cost was sufficiently attractive, leaving it in foreign currency in the interim. under the new liquidity regime, the cost of short - term foreign currency funding is higher, so this is less attractive. combined with a higher swap cost, the all - in cost of shortterm offshore funding is higher and hence domestic issuance is relatively more attractive. as a result we have seen more of it, which has contributed to the widening in the spread to ois. finally, i will return to the impact of the lcr on deposit pricing. graph 3 shows the evolution of the funding mix of australian banks over the past decade. the rise in the share of deposit funding from 2008 is readily apparent, as is the decline in the share of short - term and longterm wholesale funding. the growth in deposits is now of a similar pace to that in bank lending, having been considerably faster over recent years. as a result, the deposit share of funding has levelled off. bis central bankers ’ speeches graph 3 the increase in deposit funding was in part a result of the increased returns on offer, as banks actively sought this outcome by offering higher interest rates. ( it also reflected a shift on the part of investors for the perceived safety of a bank deposit. ) the interest rate on both at - call and term deposits rose markedly compared with money market rates of equivalent maturity ( graph 4 ). as you can see from the graph, this process of paying higher deposit rates has largely run its course. graph 4 bis central bankers ’ speeches within this overall repricing, there have been some changes in the mix of deposit rates and products as a result of the introduction of the lcr. as i mentioned earlier, banks have an incentive to