. this has obviously changed over recent years, as bank funding costs – and hence mortgage rates – have risen relative to the cash rate. as we have noted many times, the board of the rba has taken account of this in its monthly policy decisions. as a result, the cash rate today is around 1½ percentage points lower than it otherwise would have been. the fact that the bank has offset the effect of higher funding costs on lending rates means that the normal level of the cash rate is lower than it otherwise would have been. a 3 per cent cash rate today is not the same as a 3 per cent cash rate in the past. a more difficult issue to assess is the normal level of lending rates, as opposed to the normal level of the cash rate. it is difficult to be definitive here, but there are a couple of reasons why the normal level of lending rates may be lower, at least for a time, than was the case over the past two decades. the first reason is the international environment. as i talked about in another speech recently, many of the countries that avoided the financial crisis are experiencing uncomfortably high exchange rates and low interest rates. 5 australia is one of these. with the major economies of the world quite weak, most other countries would see themselves as benefiting from a lower exchange rate to boost their exports. but, of course, given that exchange rates are relative prices, not every country can simultaneously have a lower exchange rate. it should not really come as a surprise that countries that are in relatively good shape and have not seen large - scale expansion of the central bank balance sheet are experiencing stronger currencies than those that are in relatively poor shape. this is one of the mechanisms through which the weak conditions in most of the advanced economies are transmitted to the rest of the world. and in response to this, interest rates are lower than they otherwise would be to offset some of the effects of an uncomfortably high exchange rate. the second factor that might have an influence on the normal level of lending rates is related to the issues that i spoke about at the outset. for most of the past 20 years we were benefiting from either the credit boom or the terms of trade boom. under the influence of these two factors, one might expect, all else constant, higher average lending rates than otherwise, as both factors boost aggregate demand relative to supply at least for a period. another way of thinking about this is that in the earlier period there was an increase in the rate

of the rate structure in the economy. to use three examples : as one moves out along the term structure of the risk - free curve, term premia play an increasing role. risk premia are an important component of borrowing costs for private sector entities, including the banks. deans c and stewart c ( 2012 ), “ banks ’ funding costs and lending rates ”, rba bulletin, march pp 37−43. bis central bankers ’ speeches competitive pressures play an important role in deposit pricing. these sorts of determinants of the rate structure are not directly affected by movements in the cash rate. as i will discuss shortly, over the past few years, competitive pressures in the deposit market and risk premia for the banking sector globally have risen substantially. these have had a material impact on the cost to banks of funding their lending books. while these developments are not the result of movements in the cash rate, the reserve bank board takes these developments into account in its setting of the cash rate to ensure that the structure of interest rates in the economy is consistent with the desired stance of monetary policy. moreover, the link between movements in the cash rate and lending rates in australia is much tighter than in many other countries. in the us, for example, movements in the fed funds rate have a much less direct influence on 30 - year fixed - rate mortgages. composition of banks ’ funding the funding structure of the australian banking system has changed markedly over the past few years ( graph 1 ). deposits have become a much larger share of overall funding, rising from a little under 40 per cent in 2007 to 52 per cent currently. the rise in the share of deposit funding has come at the expense of a decline in the share of short - term wholesale funding from around 30 per cent to 20 per cent currently. graph 1 the structure of funding shown in graph 1 is for the banking system as a whole, not that of any particular financial institution. similarly, the analysis presented is for the cost of funding this aggregate structure and will certainly differ institution by institution. for example, the regional banks generally fund a larger share of their books via deposits, and have significantly decreased their use of securitisation. credit union and building societies continue to raise the vast majority of their funds via deposits. the major change in the funding structure of the larger banks has been the switch from short - term wholesale funding to deposits, although they have also recently increased their bis central bankers ’ speeches use of long - term secured iss