. calls on a bank ’ s liquidity will also arise when they are unable to roll over or maintain their existing funding. assumptions regarding the likelihood of this are based on the regulators ’ views about what forms of funding are more stable than others. going forward, these “ run - off ” assumptions should be expected to influence the funding strategies adopted by adis. to give one example : the incentive for adis to issue short - term debt to other financial institutions will be considerably reduced under basel iii, as funds borrowed with less than 31 days to maturity would need to be invested entirely in liquid assets. thus there will be a marked decline in the provision of such debt by banks. at the same time, the demand for liquid bank debt from other financial institutions, such as insurance companies and pension funds, is increasing, in part as a result of regulatory developments in those sectors. so there is a decrease in supply and an increase in demand for liquidity. normally, in economics, such a situation would result in a change in the price ( of liquidity in this case ) to clear the market. my concern is that it is not clear that the demand and supply curve for liquidity provided by the regulated financial system will intersect at any reasonable price. how this is resolved is not entirely clear. if it were to push the supply of liquidity outside the regulated system, that would not be a good development. in any case, it is quite probable that new funding instruments will emerge that seek to accommodate the new regulations. in some other jurisdictions, a greater reliance on debt with 31 - day notice periods ( given the 30 - day liquidity stress scenario ) has already been observed. regulators and financial institutions will need to ensure that this does not create a new stress point at 31 days as funding piles up at that maturity. one product where we are yet to see the effect of the new liquidity regulation on pricing is at - call deposits. relative to other types of deposits, these products are very expensive from a liquidity point of view, but they still offer interest rates that are a large spread above the cash rate. as banks focus on the liquidity costs of such products, i would expect to see these rates decline relative to those on other types of deposits. indeed, it would be surprising if the repricing doesn ’ t occur fairly soon given the liquidity regulations take full effect at the beginning of 2015. however, our liaison with banks suggests that these deposits are particularly sensitive to changes in

the risks associated with credit and liquidity exposures. the regulatory effort towards promoting more stable sources of debt funding and greater capital buffers for financial institutions is driven by a desire to foster financial system stability. as has been noted before, and as is apparent from the intense competition for deposits, changes in this direction have also been pursued by the banks on their own initiative, presumably in the belief that this will lower their overall cost of funding in the market. to the extent that regulations push adis to adopt a funding structure that market discipline would not make them otherwise adopt, the difference is likely to be small and the effect on overall funding costs would be smaller still. moreover, as both apra and the reserve bank have argued, any costs of this magnitude are well worth paying for a more stable financial system. 4 as regards the broader macroeconomic impact of the increase in adis ’ funding costs, it is important to remember that in the setting of monetary policy, the reserve bank board is conscious of the various rates at which credit is being priced. consequently, where there has been an overall rise in the funding cost structure for intermediaries, the board is able to set its cash rate target to appropriately take into account the effect on lending rates. in the current environment, there has been ample scope to lower the cash rate sufficiently so as to bring these other rates to where they need to be to achieve the desired stance of monetary policy, be they mortgage rates or business lending rates. in this regard, it is important to stress that the transmission of monetary policy is still very effective in australia. not only do lending rates respond to changes in the board ’ s cash rate target, there is no sense in which the aggregate supply of credit appears to have been constrained by the ongoing changes in adis ’ funding patterns. finally, it has been suggested that while the regulations may not have a large impact on the supply of credit in the current environment, banks may have difficulty funding an increased demand for credit. however, i think this concern is misplaced. in an environment where the demand for credit has picked up because the world is a better place, funding conditions for intermediaries are also likely to be much easier. moreover, from a macro perspective, there is unlikely to be a funding problem for the system as a whole when the world is a happier place, even if an individual institution is not 100 per cent sure where the next funding dollar is coming from. see, for example, laker j