sector and monetary policy. third, the central bank has the function of lender of last resort. therefore, the central bank must utilise its resources to supply short - term emergency funds during a crisis. bankers are expected the shift their business strategy away from merely surviving the crisis to exploiting the opportunities presented by the global economic recovery. strengthening the banking industry does not imply that its soundness is in doubt, however, it will lead to more efficient banks and a more optimal intermediation function.

. • and lastly, and perhaps more importantly, innovation has reduced costs, so the barriers to saving and investment, and to changing portfolio structures, have diminished. what does the increase in financial activity mean? let me now move to the second question. financial market activity is, of course, not an end in itself – at least for those people not employed in the finance sector – so the important question most people want to know is what this increase in financial activity means for the real economy. here, i think, the answer is a very positive one. vibrant, competitive and innovative financial markets work to increase the availability, and reduce the cost, of finance. there are some obvious examples of how this affects our day - to - day lives. take the housing market. the development of wholesale capital markets provided funding for non - bank lenders and allowed them to compete with deposit - taking institutions in housing lending. this led to a substantial reduction in interest margins on housing lending, from about 400 basis points 15 years ago to a little over 100 basis points today. this has been a very material benefit to australian households. the benefits of financial market development have not been restricted to households. interest margins and the cost of borrowing have also come down for businesses, as financial intermediaries have competed with capital markets in meeting businesses ’ funding needs. fifteen years ago, the average interest margin on business loans was 570 basis points ; today it is only 135 points. in short, the trading and innovation that we see in financial markets eventually flows through to reduced costs for the users of financial services. this has meant that the amount spent by households and businesses on financial services has grown much less than financial activity. for example, even though financial activity has risen by a factor of several times gdp over the past decade, the finance and insurance sector ’ s share of national income has risen only slightly, from around 5½ per cent to around 7 per cent. financial innovation has also allowed households and businesses to reduce risks. firms have been better able to structure their financing to suit the characteristics of their businesses and to manage the risks associated with their revenue flows. foreign exchange and commodity derivatives are good examples of innovations that have helped many australian companies in this regard. the overall effect of all this has been to make the economy more resilient and stable. the ability of the australian economy to come through the asian financial crisis largely unscathed owed importantly to the fact that australian firms and financial institutions had been able to hedge a lot