this has occurred with a net decline in government debt yields and a net rise in the exchange rate. the current account deficit has, in other words, been easily “ funded ” without the assistance of banks borrowing abroad – in fact, while they have been net re - payers of funds borrowed earlier. bis central bankers ’ speeches graph 9 a reasonable conclusion is that the degree of vulnerability to a global panic of any given magnitude appears to have diminished, rather than grown, over the past few years. it hasn ’ t completely disappeared, and it would not be sensible to expect it would, unless we were pursuing a policy of financial autarky. but there is little reason to assume that australian institutions are somehow unusually exposed to these risks compared with most of their counterparts overseas. in the end, of course, any bank ’ s ability to maintain the confidence of its creditors is mainly about its asset quality. that brings us back to lending standards, the macroeconomic environment, and so on. one would think that, overall, things look relatively good in australia, compared to the world ’ s trouble spots. think for just a moment about the holdings of government debt on the books of banks in any number of other countries, and about the state of public finances of many of those countries. the arguments i have presented amount to saying that some necessary adjustments have been occurring gradually and reasonably smoothly. china ’ s growth had to moderate. it has slowed, but it hasn ’ t collapsed. housing values and leverage in australia couldn ’ t keep rising. they haven ’ t. dwelling prices have already declined, relative to income, and it is in fact not obvious that they are particularly high compared with most countries. housing “ affordability ” has improved significantly ; over 99 per cent of bank - held mortgages are being serviced fully. banks have reduced their need for the sort of funding that might be difficult to obtain in a crisis situation. the current account deficit is being funded by a combination of direct equity investment, and flows into high - quality australian dollar - denominated assets, the latter at costs that have been falling. in fact, the commonwealth of australia, and its constituent states, are at present able to borrow at about the lowest rates since federation. markets do not, then, seem to be signalling serious concerns about australia ’ s solvency or sustainability. but markets can be wrong sometimes. they can sometimes be too optimistic ( and other times too pessimistic ). so even though we don ’

and the ratings agencies seem to lie behind a perpetual question mark about australia and its financial institutions. it is unlikely we will ever be able to change definitively the views of all the sceptics. and – let us be clear – we should welcome the sceptics. perhaps some of their concerns are valid. the reserve bank gives a lot of thought to these issues ; we certainly do not dismiss them. we should always be wary of the conventional wisdom being too easily accepted. we should never, ever, assume that “ it couldn ’ t happen here ”. it is in that vein that i wish to pose a set of questions that are thrown up by these sceptical views. in particular : how much of the recent relatively good performance was due to luck? to what extent did we improve our luck by sensible policies, across a range of economic and financial fronts? are there signs of any of the things going wrong that people typically worry about? bis central bankers ’ speeches and if there are, or were to be, such signs, could we do anything about it? to begin, i shall re - state some key metrics. graph 1 graph 2 bis central bankers ’ speeches graph 3 these charts really require no exposition ( graph 1, 2 and 3 ). the message is clear. it is fair to conclude that, given the circumstances internationally, the australian economy has exhibited more than acceptable performance over recent years. this conclusion would stand whether comparisons were made either against most other countries, or against our own historical experience. why was it that australia did not have a deep downturn in 2009 when so many other countries did? and why was it that we have returned to reasonable growth, when others have struggled to do so? this question has been answered on numerous occasions. there are several elements. first, the australian banking system went into the crisis in reasonable shape. to be sure, there were some poor lending decisions during the preceding period of easy credit and there was, in hindsight, too much reliance on wholesale funding. but among major institutions, credit quality issues have turned out to be manageable. asset quality was not as good among some of the regional banks, and even less so among some foreign banks operating in australia, but the problems have not been insurmountable. some observers might counter that the banks received assistance with wholesale fund raising in the form of the government guarantee. but the banks paid for that, and it was an appropriate response at a time of massive market di