The Reserve Bank of Australia deputy governor, Guy Debelle, says the short-term funding composition of the Australian banking sector has altered over the past year or so.
In a speech to the Australian Financial Review Banking & Wealth Summit, Debelle informed his audience of regulatory reforms that lead to two "noteworthy" changes relating to short-term debt.
Firstly, he said, Australia’s lenders have cut their short-term debt issuance in preparation for the introduction of the Net Stable Funding Ratio next year.
Secondly, US money market fund reforms have seen the value of assets under management of prime funds - those funds that lend to banks - fall by around 70 per cent, or US$1 trillion, over the past two years.
The money market reforms have led to this drop in investment in bank paper as some prime funds switched to become government-only funds – that is funds that invest only in US government debt. At the same time investors allocated away from prime funds to government-only funds.
“Although prime money market funds have maintained their exposure to Australian banks relative to banks globally - at around 8 per cent of total exposures to banks - their holdings of Australian bank debt have declined from around US$100 billion to less than US$30 billion,” Debelle said in his speech.
"In aggregate, Australian banks have continued to raise almost as much short-term funding from US commercial paper markets, despite the decline in money market funds.
"They have been able to tap other investors, in particular US companies with large cash holdings, such as those in the technology sector.”
The central bank official wondered whether, as a capital-importing county, Australia would be less vulnerable to a global financial shock if the global money markets seized up as they did in 2008.
Debelle said the short answer is "yes, since most of our borrowings are in the form of long-term debt".
With household debt running at 190 per cent of household income, Debelle was asked whether that was disturbing given high and rising house prices.
The deputy governor urged the audience to separate the household debt issue from the house price issue. “The two can be related but they don’t have to be," he said.
He argued that the Australian Prudential Regulatory Authority's recent announcements are to do with the resilience of the debt, rather than the actual prices of homes.