##ilizing markets – may have reinforced market perceptions that some financial firms are too important - to - fail. when markets anticipate that some financial firms will benefit from future public support, their uninsured creditors have little incentives to charge a rate commensurate with the risk of their investment. these institutions thus enjoy a funding cost advantage – in essence an implicit public subsidy. this implicit subsidy raises two important concerns for financial stability. first, it encourages risk - taking by the entities concerned, which are not subject to a proper creditors ’ market discipline. second, it can also provide perverse incentives for financial firms to grow bigger, more complex and more interconnected simply to secure public support and finally take on more risks. to answer these concerns, the policy response has focused on the issue of ‘ too - big - to - fail ’ institutions. the financial stability board ( fsb ) has proposed that global systemic financial institutions should be better capitalized and be submitted to higher capital surcharges, proportional to their contribution to systemic risk. it has also recommended a tighter supervision of these institutions, notably by setting up crisis management groups in charge of monitoring that these institutions develop appropriate resolution and recovery plans. bis central bankers ’ speeches it may be useful at this point to step back a little. the tbtf problem was not born with the crisis. the official recognition of a tbtf policy and the coinage of the term itself date back to 1984 during the testimony before congress of the then us comptroller of the currency on the government rescue of the bank continental illinois. afterwards, a further 11 banks were identified as tbtf in an article in the wall street journal. the fact that continental illinois rescue led to a subsequent decrease in market discipline for these banks has been confirmed by several academic studies. the last crisis however gave rise to two important developments in the tbtf problem. first, for the first time, taxpayer funded bailouts were extended to the uninsured creditors of nondeposit - taking entities ( the names of bears stearns and aig naturally come to mind ) for fears that their failures would have severe negative externalities. second, the list of globally systemically important banks is now set up and published by an official international body, the financial stability board, on the basis of a mandate given by the g20. in itself, this simple fact could be interpreted by markets as a signal that public authorities will never allow the thirty firms belonging to the list of g - sibs

philip lowe : investing in a low interest rate world address by mr philip lowe, deputy governor of the reserve bank of australia, to the commonwealth bank of australia ’ s 7th annual australasian fixed income conference, sydney, 21 october 2014. * * * thank you very much for the invitation to speak tonight at the commonwealth bank ’ s 7th annual australasian conference. i would like to extend a particularly warm welcome to those of you who are visiting australia to gain first - hand knowledge of our economy and our financial markets. welcome to our shores. the general topic that i would like to speak about this evening is investing in a low interest rate world. no doubt this is an issue that you have all pondered over recent times. no doubt you have all thought about which assets offer the most attractive returns in the post - crisis world in which interest rates in many countries are extraordinary low. and no doubt you have thought about the risks that come with those assets. i am not a financial advisor, so i will refrain from giving you advice on how to grapple with these difficult issues. but i would like to talk about a couple of the general challenges that we face in this world of low interest rates. the first issue has an international dimension and it has been the focus of many of the discussions around the g20 table this year – and that is, how do we translate greater risktaking on the financial side of the economy into greater risk - taking on the real side. the second issue, which has a more domestic focus, is recent developments in the australian housing market. the international challenge it is useful to start with a reminder of just how unusual the current global environment is. interest rates are as low as they have ever been in most advanced economies. in the united states, the euro area, japan and the united kingdom official interest rates are essentially zero. in germany, investors actually pay the government for the privilege of lending to it for terms of three years or so. and in the euro area, banks are now faced with negative interest rates on their deposits at the european central bank ( ecb ), and the ecb is prepared to lend money to banks for terms of up to four years at just 15 basis points. a number of the major central banks have also engaged in very substantial money creation to buy large quantities of assets from the private sector, including government bonds, assetbacked securities and equities. as a result, financial institutions are holding record balances at central banks and