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SYDNEY, May 23 (Reuters) - Reserve Bank of Australia (RBA) deputy governor Guy Debelle said on Tuesday that an increase in the cross currency basis may not be a sign of stress and can be consistent with functioning markets.
The cross-currency basis indicates the amount by which the interest paid to borrow one currency by swapping it against another differs from the cost of directly borrowing the currency in the cash market.
Debelle made the remarks in Basel in a speech titled "How I learned to stop worrying and love the basis."
"Most of the time, the basis is not a sign of stress," said Debelle, who is also heading the Bank for International Settlements' (BIS) foreign exchange working group developing a global code of conduct for the forex market.
"I wouldn't be losing sleep over it in the way that I literally lost sleep over it in 2008," he added.
Since 2007, the basis for lending U.S. dollars against most currencies, notably the euro and yen, has been negative: borrowing dollars through the FX swap market became more expensive than direct funding in the dollar cash market, according to a quarterly review by BIS last September.
For some currencies, such as the Australian dollar, it has been positive.
For conservative asset managers such as the RBA, the basis offers better returns, Debelle said.
"We can...earn the often quite substantial return by swapping from the various reserve currencies that we hold into yen where the basis tends to be the widest," he said.
"In addition to that, we can also swap Australian dollars, our natural funding currency, into yen for domestic liquidity management purposes."
The Reserve Bank's balance sheet was around A$167 billion ($124.48 billion) as at 30 June 2016, an increase of around A$10 billion over the financial year, according to its latest annual report. ($1 = 1.3416 Australian dollars) (Reporting by Swati Pandey; Editing by Kim Coghill)