broad array of nonbanks and banks of all sizes that provide credit to our economy. starting with banks : the banking sector remains sound and resilient overall. most banks continue to report solid capital levels well above regulatory requirements. the rise in interest rates over the past two years has contributed to robust bank profitability, as banks earned higher interest income on floating - rate loans while interest expense on many deposits remained well below market rates. at the same time, higher long - term interest rates also substantially affected the fair value of banks ’ holdings of fixed - rate assets. as we saw earlier this year, fair value losses on bank balance sheets, when combined with poor liquidity and interest rate risk management, can leave banks exposed to additional risk. while acute stresses have abated, i continue to monitor this situation closely. some nonbanks can be quite leveraged. for example, available data suggest that hedge fund leverage remains elevated, especially for the largest hedge funds. it is important to better understand how their leveraged activities could impact the functioning of underlying markets. funding risks looking at funding, many financial institutions raise funds from the public with a commitment to return their money on short notice. but those institutions then invest much of those funds in assets that are hard to sell quickly or have a long maturity. this - 7liquidity and maturity transformation can create strains across markets or institutions, particularly in the absence of a lender of last resort such as the fed ’ s discount window for commercial banks. in the banking industry, the deposit volatility that we saw earlier this year has abated. that said, some banks have had to turn to higher - cost funding sources to make up for lost deposits and face reduced market values for investment securities. outside of banking, we also monitor a wide range of nonbank financial institutions ( nbfis ) such as money market funds, open - end funds, insurers, central counterparties, and digital assets. many of their activities give rise to a liquidity mismatch that could amplify market stress. they have daily or frequent redemption possibilities on the liability side while holding less - liquid assets. i think the securities and exchange commission ’ s ( sec ) recent reform on money market funds and proposal for open - end funds are encouraging steps toward mitigating funding risks arising from nonbanks. salient near - term risks let me now describe how these vulnerabilities factor into how i see the resilience of the

“ evaluating urban transport improvements : cost - benefit analysis in the presence of agglomeration and income taxation ”, journal of transport economics and policy, 41 ( 2 ), 173 – 188, and sgs economics and planning ( 2012 ), “ productivity and agglomeration benefits in australian capital cities ”, final report, coag reform council, june. infrastructure australia ’ s approach to the appraisal of wider economic benefits is outlined at < http : / / www. infrastructureaustralia. gov. au / reform _ investment / submissions / appraisal. aspx >. kulish m, a richards and c gillitzer ( 2011 ), “ urban structure and housing prices : some evidence from australian cities ”, rba research discussion paper no 2011 – 03. bis central bankers ’ speeches more efficiently. doing so would promote productivity growth in australia and contribute to advancement of the overall welfare of our citizens. the potential challenges in this area are, however, significant. i would like to highlight three of these. the first is the governance of project selection. clearly, not all investments in transport are a good idea, and some ideas are much better than others. there is, i detect, a deal of scepticism in the public ’ s mind about how projects are selected. this scepticism weakens public support for large - scale investment in infrastructure. many people are concerned that money will be wasted and that political considerations will trump economic considerations. so strong governance is critical to make sure money is spent wisely in this area. there is no substitute for rigorous and transparent cost - benefit analysis. in australia, we have made some progress in this area over recent times through bodies like infrastructure australia. building public confidence in the governance process not only helps ensure that the most pressing projects are selected, but also helps build public confidence that the money is being spent wisely. this brings me to the second potential challenge – that of financing. it is no use identifying infrastructure projects with large potential gains if a way cannot be found to finance them. the financing challenge arises not because of a lack of money available to invest in infrastructure. many private sector investors tell us that there are plenty of funds sitting on the sidelines waiting to be invested in infrastructure assets. the issue is more a reluctance of investors to take on the construction and patronage risks and / or the difficulties of charging for the use of infrastructure. given these challenges, the public sector can play an important enabling role