these are positive developments and they provide us with an extra degree of insurance against future shocks. of course, this insurance does not come for free. higher capital, more liquidity and more expensive, stable funding all have a price. we need to keep an eye out to make sure that this price is not too high and that we don ’ t constrain the ability of the financial system to do its job. my view is that this has not been the case in australia and that the changes have increased the resilience of our system. there is, though, a legitimate discussion to be held as to who pays the price. we see this issue frequently debated in our media. one possibility is that the cost falls on the bank shareholders in the form of lower returns on equity. another is that it falls on borrowers in the form of higher interest rates on bank loans relative to the cash rate. ultimately, the balance is for the market to sort out, but it would seem unlikely that the cost will fall entirely on one side or the other. over time, shareholders and borrowers will both benefit from these larger buffers to the extent that they contribute to economic stability. the shareholders should experience less volatile returns and borrowers should be more likely to be supported during difficult times. the larger buffers provide a form of insurance to all. fiscal arena a second area where buffers are important is on the fiscal front. again, the events of the past decade provide a useful illustration. 5 / 11 bis central bankers'speeches in europe, we saw examples of what can happen when public finances are not in order when difficult times strike. in some countries, when troubles arrived, governments felt that they had little choice other than to impose austerity measures to restore the fiscal accounts, despite the fact that these measures added to the immediate downturn in the economy. australia, again, provides a counter example. when the shockwaves of the global financial crisis hit us, the australian government did have the capacity to support the economy through a fiscal expansion. this support was one of a number of factors that helped us get through this period. the ability to provide the stimulus was enhanced by the sound fiscal position that had been built up over previous years ( graph 4 ). while the exact nature of the stimulus remains a matter of debate, regardless of where you stand on that debate the fiscal buffers that we had did provide us with options that not all other countries had. since the financial crisis in 2008

philip lowe : buffers and options speech by mr philip lowe, governor of the reserve bank of australia, at the committee for economic development of australia ( ceda ) annual dinner, melbourne, 15 november 2016. * * * i would like to thank andrea brischetto for assistance in the preparation of this talk. it is an honour to be able to address ceda ’ s annual dinner. it became a tradition under the previous governor, glenn stevens, to speak at these dinners about prosperity : what it looks like and how australia might continue to secure it in the uncertain world in which we live. this is a tradition that i would like to continue. i could understand why you might not have guessed that looking at the title of my remarks this evening : ‘ buffers and options ’. you might have feared that this was going to be an esoteric talk about finance. but that is not what i have in mind. instead, i chose this title because it summarises the one element of securing prosperity that i want to focus on tonight. glenn spoke in detail about the various things that we can do to lift our average growth rate. rather than repeating these, i would like to focus on another element of the challenge. and that is managing risk and ensuring resilience. to provide some context i would like to begin with two observations. the first is that australia ’ s economic success over recent decades reflects both the underlying fundamentals and our ability to ride out various shocks. the fundamentals that have helped us are well known. they include our openness to trade and investment, our generally favourable demographics, our diverse and talented people, our abundance of natural resources, our ability to undertake structural reform to boost productivity and our links with the fast - growing asian region. but also important to our prosperity is the fact that over the past quarter of a century, our economy has not been seriously derailed by economic shocks. after all, nothing undermines prosperity like a severe recession in which large numbers of people lose their jobs and see their wealth decline. it is not as if there has been a shortage of shocks that could have derailed us. there was the asian crisis, the bust of the us tech boom and the global financial crisis. we also experienced a once in a century surge in our terms of trade and the subsequent decline. the point is that we have been able to ride out these and other shocks without too much difficulty. in part this is because of the flexibility of our exchange rate