holdings of debt securities. this results in a higher ratio of loans to deposits in australia. but, rather than being a weakness, i would regard this as a strength of the australian banks, as events of the past couple of years have shown that holdings of securities can be more risky than loans. table 2 ratio of loans to deposits1 december 2008, per cent major banks australia canada germany japan united kingdom united states data based on the major banks in each country. foreign and domestic loans and deposits ( including cds ). sources : central banks, national statistical agencies, banks ’ financial statements, standard and poor ’ s, rba. the figures for deposit shares in the table are higher than the figures quoted earlier in this talk because of definitional differences. to allow international comparisons, the figures for deposits in the table include cds and are for the banking group, and hence include overseas as well as domestic operations. the denominator used to measure total funding is on - balance sheet liabilities ( excluding derivatives ) rather than total funding including equity and securitisation. how far can banks lift their deposit ratios? an individual bank has a large amount of discretion in the way it funds itself, as it can bid more aggressively for the type of funds it wants and compete them away from other banks. the banking sector as a whole, however, has much less flexibility. for the banking sector as a whole to increase its use of deposit funding, it needs to be able to induce a shift in the structure of the financial system away from financing through capital markets to on - balance sheet funding through the banking sector. put another way, for the banking system as a whole, the share of deposits in total funding can increase only to the extent that investors reduce their holdings of securities and place the proceeds on deposit with banks. there are limits to the extent this can happen since there are a range of structural, economic and cultural factors that shape the composition of a financial system, and these do not change quickly. in fact, the trend in most economies is for savings over time to move away from simple instruments such as bank deposits towards debt securities and equities. to try to shift savings back to deposits would require a reversal of these trends, and there must be doubts about how feasible that would be. there is also the question of whether it would be sensible from the point of view of the overall functioning of the economy and the financial system. as i noted earlier, over the past year australian banks as a whole

a severe crisis this can shorten significantly for many funding sources. this is because banks can come under pressure to allow term deposits to be redeemed early and to buy back short - term capital market debt. while a bank could try to enforce the contractual maturity on its funding, the reality is that, unless the bank is already in great difficulty, this could draw attention to itself and accentuate its problems. another issue is that the behaviour of new depositors attracted through more competitive pricing may also be very different from that of existing depositors. these new deposits are likely to be more price sensitive and less stable. the benefit, in terms of funding stability, which comes from increasing deposits through competitive pricing, may therefore be somewhat illusory. how do australian banks compare internationally? there is a common perception that banks in australia make less use of deposits to fund themselves than do banks in other countries. however, the difference between australian banks and their overseas peers is sometimes exaggerated by inconsistencies in the data across countries. table 1 contains some data the reserve bank has put together on deposit funding for the major banks in australia, canada, germany, japan, the united kingdom and the united states. we have tried to make the data as consistent as possible although they are probably still a long way from being fully consistent. the data show that, contrary to popular perception, the share of funding from deposits for the major banks in australia is similar to that for the major banks in germany, japan, the united kingdom and the united states. 1 table 1 share of domestic and foreign deposits in total funding1 december 2008, per cent major banks australia canada germany japan united kingdom united states data based on the major banks in each country. deposits include cds. total funding equals total liabilities, excluding derivative liabilities. sources : central banks, national statistical agencies, banks ’ financial statements, standard and poor ’ s, rba. another commonly quoted metric used to support the case that australian banks are underweight deposits is the relatively high ratio of loans to deposits in australia. the ratio for the major banks in australia is around 130 per cent, whereas in most overseas countries the ratio varies between 80 per cent and 100 per cent ( table 2 ). however, as i have noted, this is not due to australian banks having lower deposit funding. the high ratio of loans to deposits reflects differences in asset composition. banks in australia mainly have loans on the asset side of their balance sheet, whereas banks overseas often have large