Australia Trials Bank Liquidity Regime Ahead of 2015 Rollout

Australia’s banking watchdog said it is testing procedures for implementing a new liquidity regime ahead of its official rollout in 2015.

Lenders have been asked to submit a proforma application to access the central bank’s funding facility to cover their expected shortfall of liquid assets in 2014, the Australian Prudential Regulatory Authority said in a statement on its website. The trial will help determine steps taken by banks to reduce their liquidity risk.

Due to the shortage of high-quality liquid assets in Australian dollars, such as federal and state government bonds, banks will be allowed to access the central bank’s funding facility to meet Basel III rules. Under the new framework being rolled out to address systemic shortcomings exposed by the 2008 financial crisis, banks will need to hold enough assets to withstand at least 30 days of severe liquidity stress.

Since 2008, banks have made “steady and material improvements to their liquidity risk profiles, but more remains to be done,” APRA said.

Lenders have reduced their reliance on bond markets and increased deposits to improve their liquidity profile. The share of banks’ funding from domestic deposits has increased from 40 percent in 2008 to 55 percent at the expense of short-term debt funding, the central bank said in its Financial Stability Review in March.

Banks can access Reserve Bank of Australia’s liquidity facility to meet Australian dollar funding shortfalls only, the regulator said. The size of the committed liquidity facility will be determined by estimating the available Australian high-quality liquid assets, submission of a three-year funding plan by the banks and allowance for a buffer.

APRA plans to stick with its timetable to implement new liquidity rules and won’t widen the range of permissible assets, declining to follow global peers who have softened their stance, it said in May.

Global central bank chiefs in January agreed to let banks meet only 60 percent of the liquidity obligations by 2015, with the full rule phased in through 2019. Those lenders may also use some equities and securitized mortgage debt to meet the requirements, assets which APRA will not allow.

To contact the reporters on this story: Narayanan Somasundaram in Sydney at nsomasundara@bloomberg.net; Benjamin Purvis in Sydney at bpurvis@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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