theory and practice closer together. 5 in general, it seems that investors ’ preferences for different types of assets are affected not just by the risk and return of those assets. equity investors seem to want higher, more volatile returns. they like their equity to be equity - like. so making it safer doesn ’ t reduce its cost as much as it should. and for banks, whose short - term debts are the money used by the real economy, the effect is compounded. depositors want a stable liquid store of value for a rainy day. they don ’ t want equity. so they understandably take some persuading to swap their rainy day fund into bank equity. 6 regardless of its cause, the evidence that higher capital requirements can push up bank funding costs can ’ t be ignored. the costs will be borne by real borrowers – in higher cost of funds, and real savers – in lower returns. in theory, monetary policy may be able to offset the overall effect of that on inflation. but it can ’ t alter the fact that the costs will be higher of matching lenders with borrowers, capital providers with capital seekers, and risk takers with risk hedgers. miles et al ( 2012 ) presents a central estimate that the reduction in the volatility of equity returns and riskiness of debt offsets about half the increase in funding costs that would, other things equal, result from switching debt to more expensive equity funding. elliott ( 2013 ) sets out areas of disagreement in the debate about the economic costs of higher bank capital requirements. the low risk anomaly, whereby lower risk stocks generate no lower and in some cases even higher stock returns than higher risk stocks, is documented for banks by baker and wurgler ( 2013 ). the impact of depositor liquidity preference is discussed in kashyap et al ( 2010 ). bis central bankers ’ speeches that ’ s not just a private cost. it ’ s a social cost too. at the margin, it will force a change in the mix of economic activity. the ability to turn future cashflows into today ’ s investments will be curtailed. spending will replace investment. investment projects will have lower returns. that holds back future economic potential. although it ’ s impossible to be precise, it seems that once a baseline degree of resilience has been established, more capital could actually cost the economy. we estimate that a 100bps increase in capital requirements across a banking system could result in an economic

gdp and 35 per cent of our exports, so it is important. reflecting this, this is my third trip to, and public speech in, perth in the past year. this morning we heard that while the western australian economy is still feeling the effects of a decline in the level of mining investment, there are some positive signs. the level of mining investment has further to fall as some large liquefied natural gas projects are completed. but elsewhere in the resources sector things are looking brighter. sustaining capital expenditure, particularly in the iron ore sector, is picking up with positive spillover effects. higher prices for a number of minerals have also led to increased exploration activity, including for gold and lithium, and an expansion of some existing mines is taking place. for the first time in a number of years, we are hearing reports through our liaison program in western australia that it is difficult for firms to find workers with the right skills, including project engineers and related occupations. business conditions – as measured by surveys – have also risen significantly and are now above average. at our meeting, we also discussed the population dynamics here in western australia. at the peak of the resources boom, annual population growth reached almost 3½ per cent, which is very fast. people moved here from overseas and from the rest of australia to meet the needs of your rapidly growing economy. in contrast, over the past year, population growth has slowed sharply, to around ¾ per cent, which is almost the slowest of any state in the country. there is now a considerable net flow of people from western australia to the eastern states. this change in population dynamics has had a significant effect on housing markets in western 3 / 4 bis central bankers'speeches australia. the earlier strong growth in population contributed to a sharp rise in housing prices and rents, and then a bit later to a surge in housing construction. with the resources boom now in the past, some of the earlier increases in prices and rents have been reversed and residential construction activity has been low. western australia has seen this type of cycle before, and i expect it will see it again at some point in the future. our liaison, though, suggests that a stabilisation of conditions is in prospect. if so, this should help support consumer confidence and household spending and reinforce the recent more positive news from the resources sector. finally, as i mentioned earlier, we are currently upgrading australia's banknotes. i am pleased to be able to announce that the new $ 50 note will