guy debelle : bank funding address by mr guy debelle, assistant governor ( financial markets ) of the reserve bank of australia, to the 24th annual finance & treasury association congress, sydney, 19 october 2011. * * * thanks to justin fabo, claudia seibold and dan fabbro for their help. one aspect of the current heightened risk aversion in financial markets has been an increase in funding pressures for some banks, particularly in europe. in my talk today, i will discuss some aspects of these developments, comparing and contrasting the situation in europe with that in australia. 1 a summary indication of investors ’ assessment of the financial sector can be gleaned from the share prices of banks globally. graph 1 shows the movements in bank share prices over the past four years and compares them to developments in the rest of the market. it shows that, in most cases, bank share prices have significantly underperformed the rest of the market. many banks are now trading at a sizeable discount to their book value. graph 1 also shows that european bank share prices have fared worse than those in other parts of the world. volatility has also been very high at times, with some banks in europe recording intraday share price movements of 20 per cent! the share prices of the australian banks have not fallen as far as those in the major countries, although it is interesting to note that the share prices of canadian banks have been even stronger. over the period since june 2007, banks have actually outperformed the rest of the australian market. graph 1 with the share prices as a backdrop, today i will focus on one particular aspect of the banking sector that is causing concern, primarily in europe, namely the resilience of the funding structure. this issue has implications for all of you as corporate treasurers as it flows on to you in terms of price and volume, although not necessarily always in a negative way : a number of these developments are discussed in detail in the reserve bank ’ s september financial stability review. bis central bankers ’ speeches we have seen some corporates able to access markets directly on better terms and conditions than financials. as the concerns about the fiscal sustainability of the euro area have intensified in recent months, and have spread to the financial system, there has been increased pressure on bank funding. 2 the cost of funding for european banks generally has risen, while many banks in the european “ periphery ” countries have all but been locked out of funding markets. as an

the transformation of the australian financial system ”, reserve bank of australia conference paper, 2021 august 2007. available at http : / / www. rba. gov. au / publicationsandresearch / conferences / 2007 / index. html. the primary effects of this borrowing were therefore on asset values, the most noticeable being the more than doubling in house prices. while there was also some spill - over into consumer spending, the expansion of household credit by and large has been a story about asset markets. similar developments have been experienced by many other developed economies over the past decade. looking ahead has the expansion of household credit run its course? will it reverse? we cannot know the answer to these questions with any certainty, but my guess is that the democratisation of finance which has underpinned this rise in household debt probably has not yet run its course. in the past, the lack of access to credit had resulted in australian household sector finances being very conservative. even as recently as the 1960s, the overall gearing of the household sector ( taking account of all household debt and all household assets ) was only about 5 per cent – that is, households owned 95 per cent of their assets, including houses, outright. this meant that the household sector had significant untapped capacity to service debt and large unencumbered holdings of assets to use as collateral for borrowings. financial institutions recognised this and found ways to allow households to utilise this capacity. the increase in debt in recent years has lifted the ratio of household debt to assets to 17½ per cent ( graph 6 ) 3. i don ’ t think anybody knows what the sustainable level of gearing is for the household sector in aggregate, but given that there are still large sections of the household sector with no debt, it is likely to be higher than current levels. graph 6 cross - sectional data show that the rise in household debt has been driven primarily by middle - aged, and higher - income, households. thus, while the build up of household debt is measured on the same basis as corporate gearing ( i. e. the ratio of debt to equity, rather than debt to assets ) household gearing is marginally higher, at 21 per cent. often portrayed as being driven by young couples trying to buy their first home, a more accurate description is that it is mainly being driven by older, higher - income households that are trading up to higher quality or better located houses, buying investment properties and taking out margin loans