Australian implementation of global liquidity standards

On 16 December, the Basel Committee on Banking Supervision (Basel Committee) announced its global framework for promoting stronger liquidity buffers at internationally active banking institutions.

The centrepiece of this framework is a new standard for liquidity risk that aims to ensure that banking institutions have sufficient high-quality liquid assets to survive an acute stress scenario lasting for one month. The standard will come into effect on 1 January 2015. Under the new Liquidity Coverage Ratio (LCR) requirement, the bulk of high-quality liquid assets in most jurisdictions will take the form of holdings of government debt.

Fiscal prudence by a succession of governments means that the supply of government securities in Australia is relatively limited. A second level of eligible liquid assets that includes certain non-bank corporate debt is also in short supply in Australia. A small number of other jurisdictions are in a similar position. To address this situation, the Basel Committee’s framework incorporates scope for alternative treatments for the holding of liquid assets. One alternative treatment is to allow banking institutions to establish contractual committed liquidity facilities provided by their central bank, subject to an appropriate fee, with such facilities counting towards the LCR requirement.

The Reserve Bank of Australia (RBA) and the Australian Prudential Regulation Authority (APRA) have agreed on an approach that will meet the global liquidity standard. Under this approach, an authorised deposit-taking institution (ADI) will be able to establish a committed secured liquidity facility with the RBA, sufficient in size to cover any shortfall between the ADI’s holdings of high-quality liquid assets and the LCR requirement. Qualifying collateral for the facility will comprise all assets eligible for repurchase transactions with the RBA under normal market operations. In return for the committed facility, the RBA will charge a market-based commitment fee.

The commitment fee is intended to leave participating ADIs with broadly the same set of incentives to prudently manage their liquidity as their counterparts in jurisdictions where there is an ample supply of high-quality liquid assets in their domestic currency. Detailed work on determining an appropriate fee based on this principle is currently underway. A single fee will apply to all institutions accessing the facility.

The approach will be applicable only to the larger ADIs (around 40 in number). APRA does not intend to apply the LCR requirement to ADIs that are currently subject to a simple quantitative metric, the minimum liquid holdings (MLH) regime. In APRA’s view, the MLH regime is working effectively in delivering an appropriate degree of resilience for ADIs with simple, retail-based business models. Accordingly, APRA intends to retain the current approach for these ADIs.

For its part, APRA will require the larger ADIs to demonstrate that they have taken all reasonable steps towards meeting their LCR requirements through their own balance sheet management, before relying on the RBA facility.

The details of the RBA liquidity facility and APRA’s prudential standard on liquidity risk management, which will give effect to the global liquidity framework in Australia, will be subject to consultation during 2011 and 2012.

Contacts:

RBA — Media Office, Information Department — (02) 9551 9720 or e-mail rbainfo@rba.gov.au

APRA — Andrew McCutcheon, Media and Communications Manager — (02) 9210 3143 or 0417 528 660