and which has the confidence of local and foreign participants. this is quite a demanding list for several reasons. first, it is quite broad and involves the legal system, the government, regulatory bodies, financial market participants and the professions. secondly, and more importantly in my view, the achievement of a high standard in each of the items on this list takes a very long time. in our case, some of these things took a century to achieve. in many cases, we look back to periods as recent as the 1980s and wonder why we ever thought that we had done enough. that is one of the reasons i have been sympathetic to our asian neighbours. it is inevitable that at an early stage of development of a country, its financial infrastructure will be only partly formed. furthermore, even with the best will in the world, it is going to take time to bring these things up to scratch. when people say that the recent financial and economic instability was the inevitable result of a combination of the free flow of international capital plus inadequate financial infrastructure, there is much truth in the statement. but if that is the case, we cannot expect a sudden return to stability because the second essential component - the adequate financial infrastructure - will take years, or possibly decades - to achieve. the second thing we learnt from the asian crisis, and its spread to other countries, was the necessity of having deep and liquid financial markets. we also learnt it was an advantage to have a floating exchange rate, and to have a capital market that was diversified and not one that was too dependent on the commercial banking sector. this brings me to the australian financial system, to the capital markets and to financial markets more generally. the australian financial system has developed rapidly over the past 20 years or so, with deregulation being a major driver of change. deregulation started in the late 1970s with the gradual removal of controls over bank interest rates. it picked up speed in the early 1980s with the removal of other controls on banks, freeing up interest rates on government securities ( by adopting tender arrangements for new issues ), floating the exchange rate and opening up the banking system, in the mid 1980s, to foreign competition. shortly thereafter, bank supervision was formalised, and the basel framework for capital adequacy of banks was adopted in 1988. the development of the financial markets in australia is not, of course, the result purely of regulatory change. financial institutions themselves have taken the opportunity to develop new markets and introduce new products. for example

. as shown in the chart above, about half of owner - occupier loans have prepayment balances of more than 6 months of scheduled payments. while that leaves half with only modest balances, some of those borrowers have relatively new loans. they wouldn ’ t have had time to accumulate large prepayment balances nor are they likely to be close to the scheduled end of their interestonly period. there are borrowers who have had an interest - only loan for some time but haven ’ t accumulated offset or redraw balances of substance. 12 offset and redraw balances are typically lower for investor loans compared with owner - occupier loans. that is consistent with investors ’ incentives to maximise tax deductible interest. however, in comparison to households that only hold owneroccupier debt, there is evidence that investors tend to accumulate higher savings in the form of other assets ( such as paying ahead of schedule on a loan for their own home, as well as accumulating equities, bank accounts and other financial instruments ). 13 refinancing another option for borrowers is to negotiate an extension to their interest - only period with their 9 / 13 bis central bankers'speeches current lender or refinance their interest - only loan with a different lender. similarly, they may be able to refinance into a new p & i loan with a longer loan term, thereby reducing required payments. based on loans in the securitisation dataset, a large majority of borrowers would be eligible to alter their loans in at least one of these ways. 14 any such refinancing will reduce the demands on a borrower ’ s cash flows for a time. however, it is worth noting that by further delaying regular principal repayments, eventually those repayments will be larger than otherwise. extra income or lower expenditures what about borrowers who have not built up savings ahead of time or are unable to refinance their loans? the securitisation dataset suggests that such borrowers are in the minority. more importantly, most of them appear to be in a position to service the additional required payments. indeed, the tightening of loan serviceability standards a few years ago was no doubt helpful in that regard. some fraction of interest - only borrowers may have used the reduced demands on their cash flows during the interest - only period to spend more than otherwise. however, the available data,