Not sure how the Govt issuing LT bonds affects bank lending policies?
Banks have to hold the safest and most liquid paper which in Australia is government bonds. Unfortunately for them - there is not enough being issued to satisfy the requirements of Basel3 capital(1) ratios. That is one problem, but the other is - the Australian government doesn't issue 30 year bonds. So the banks have to be in the business of maturity transformation.
In regards to derivatives and their reporting: a) - the global regulation has changed: all derivative products HAVE to be registered with authorities and traded VIA exchanges (over the counter)! b) - there are two distinct accounting standards of reporting derivative positions: 1) netting out. 2) or gross (notional).
And that is the never argument between US and European regulators: which one is 'better'?
a) If banks net out their positions - obviously the balance sheet shrinks with the effect of having to hold less capital (good looking capital ratios). b) If banks report their gross positions - the balance sheet effect is that they need to hold more capital against derivatives (bad looking capital ratios).
Since you are looking at gross (notional) reporting data (i.e. derivative positions before netting out between counterparties) - the numbers are large. But, from an accounting point of view - it is a true representation of derivatives on the books, simply because (as you have stated) - the 'future' loss/gain is unknown - the risks of some of the counterparties may default. If that happens - the netting out is reported.
Most (~80%) of the Australian banks currency exposure is to USD, simply because that is the most liquid financial international instrument. And yes, 70% of the Australian banks exposure to international markets is hedged. Very prudent.
Of course - you are aware that all international (cross country) bank positions are reported to BIS.
'Imagining' doesn't work on bank balance sheets or for bank profitability & stability.
Managing risks, reporting true representation of positions (assets & liabilities) and satisfying bank regulation requirements does.
