APRA clarifies implementation of global liquidity standards in Australia

11.03

The Australian Prudential Regulation Authority (APRA) has clarified the treatment of high‑quality liquid assets it will apply when implementing the new global liquidity standard announced by the Basel Committee on Banking Supervision (Basel Committee) in December 2010.

The new global liquidity standard — known as the Liquidity Coverage Ratio (LCR) requirement — aims to ensure that banking institutions hold a stock of high‑quality liquid assets sufficient to survive an acute stress scenario lasting for one month. The Basel Committee defines two categories of assets that can be included in this stock:

• Level 1 assets are limited to cash, central bank reserves and highest‑quality sovereign or quasi‑sovereign marketable instruments that are of undoubted liquidity, even during stressed market conditions; and
• Level 2 assets (which can comprise no more than 40 per cent of the total stock) are limited to certain other sovereign or quasi‑sovereign marketable instruments, as well as certain types of corporate bonds and covered bonds, that also have a proven record as a reliable source of liquidity even during stressed market conditions.

APRA has been reviewing a range of marketable instruments denominated in Australian dollars against the Basel Committee’s criteria for high‑quality liquid assets. This review has taken into account the amount of the instrument on issue, the degree to which the instrument is broadly or narrowly held, and the degree to which the instrument is traded in large, deep and active markets. APRA has given particular attention to the liquidity of the instrument during the market disruptions of the global financial crisis.

Based on this review, APRA has determined that, at this point of time:

• the only assets that qualify as Level 1 assets are cash, balances held with the Reserve Bank of Australia, and Commonwealth Government and semi‑government securities; and
• there are no assets that qualify as Level 2 assets.

The LCR requirement comes into effect on 1 January 2015. During the preceding ‘observation period’, the Basel Committee will be testing a number of additional qualitative and quantitative criteria to evaluate the liquidity characteristics of Level 2 assets. Depending on the outcome of this work and on market developments over this period, it is possible that some instruments may become eligible as Level 2 assets, or the range of qualifying Level 1 assets may expand, by the time the LCR requirement is introduced in Australia.

The treatment of Level 1 and Level 2 assets for purposes of the LCR requirement does not affect the set of instruments that the Reserve Bank of Australia (RBA) will accept as qualifying collateral for its committed secured liquidity facility. Qualifying collateral will comprise all assets eligible for repurchase transactions with the RBA under normal market conditions (see Australian implementation of global liquidity standards joint APRA/RBA Media Release of 17 December 2010. Accordingly, APRA does not anticipate that its treatment of Level 1 and Level 2 assets will have a material impact on the status of marketable instruments in the Australian capital market.