of a shock. in other words, it was a financial stability issue not only because of its potential impact on banks ’ balance sheets, but also because it was increasing the vulnerability of the household sector. the importance of the major banks for financial stability is also explicitly recognised in the regulatory framework. since the financial crisis there has been a major international effort to increase the resilience of the global financial system, and australia has been an active participant both in the policy debate and in implementation. there have been a number of elements to this work – raising capital levels, increasing liquidity buffers, identifying and regulating systemically important financial institutions and addressing the issue of ‘ too big to fail ’. the implementation of capital requirements in australia has been driven by the international move to higher capital ratios as well as a desire to ensure that the australian banks are ‘ unquestionably strong ’. the financial system inquiry ( fsi ) set out the rationale for australian banks to achieve this. it noted that the concentrated nature of the system and the similar business models of the major banks could exacerbate contagion if one major bank experienced difficulties. with capital levels increasing around the world, the fsi therefore concluded that it was important that the australian regulatory framework continued to evolve to ensure confidence in the australian banks. it also suggested that higher capital ratios would help to reduce the value of any implicit government guarantees. australian banks ’ capital levels have therefore risen substantially in recent years, both relative to the past and in relation to international peers ( graph 5 ). furthermore, consistent with the basel framework for domestic systemically important banks ( d - sibs ), apra has determined that due to their size, interconnectedness, substitutability and complexity, the major banks should be required to hold more capital against their risk - weighted assets than smaller financial intuitions. specifically, they are required to hold an additional 1 per cent of their risk - weighted assets as common equity tier 1 ( cet1 ) capital, bringing the minimum cet1 capital requirement for the major banks to 8 per cent ( graph 6 ). all of the major banks are currently comfortably above this minimum. but apra ’ s announcement earlier this week on unquestionably strong capital ratios means that the larger banks, in particular, will need to build their capital a little further over coming years. as d - sibs, the major banks are also subject to more intense supervision by apra. 6 / 9 bis

was relatively difficult. however, after financial regulations were eased around the globe, many new financial products were developed specifically for households, and particularly relating to housing finance. households found it was much easier to get a loan. most loans products have worked well, though some have caused significant problems ; subprime loans in the united states are the clearest example. the level of interest rates in most developed economies in the past decade has been about half that in the decade to 1995. this structural decline in interest rates has facilitated the increase in household debt ratios because it reduced debt - servicing costs ( table 1 ). households have therefore found that they can now service more debt than used to be the case. note that there is no particular reason why household debt ratios should be the same across countries. has the rise in household debt left households over - exposed financially? in trying to judge this, there are a few considerations to take into account. first, at the same time as the household debt ratio has risen, so too have the assets held by households. some commentators might dismiss this as simply reflecting the fact that the additional debt has been used to inflate asset values. there is some basis for this in relation to housing assets but, even if we exclude housing and focus only on households ’ financial assets, the statement is still true. financial assets held by households have risen to the equivalent of 2. 75 years of household income, up from 1. 75 years ’ income in the early 1990s. second, the available data suggest that the increased debt has mostly been taken on by households which are in the strongest position to service it. for example, if we look at the distribution of debt by income, we can see that the big increases in household debt over the past decade have been at the high end of the income distribution ( graph 3 ). households in the top two income quintiles account for 75 per cent of all outstanding household debt ( graph 4 ). in contrast, households in the bottom two income quintiles account for only 10 per cent of household debt. if we look at the distribution of debt by age of household, we see that the increased debt has mainly been taken on by middle - aged households. the proportion of 35 – 65 year olds with debt increased significantly through to 2008, as households have been more inclined to trade up to bigger or better located houses, and to buy investment properties. households under 35 years of age ( i. e. the group that would typically encompass first