The Reserve Bank of Australia set a fee to use its liquidity facility low enough to discourage the nation’s lenders from using central bank deposits to meet new global regulations, Assistant Governor Guy Debelle said.
Without the liquidity facility, a lack of federal and state government debt would lead banks to rely on exchange settlement balances that are a key part of the RBA’s system for setting borrowing costs, Debelle said in prepared remarks for a speech in Sydney today.
Overuse of the settlement accounts could have affected “the ability to meet the cash rate target set by the Reserve Bank board,” said Debelle, who oversees financial markets. “The RBA concluded that the fee needed to be set high enough to ensure banks had the appropriate incentives under the liquidity standard, but low enough to not generate unwarranted distortions in the domestic market.”
The central bank last week set an annual fee of 15 basis points for financial companies to access standby funds as the nation moves to adopt the Basel III rules aimed at averting a lending freeze. The RBA also said it will widen starting Feb. 1 the margin applied under repurchase agreements to long-term assets issued by entities other than Australia’s governments.
The Basel Committee is seeking to bolster banks’ liquidity and capital to prevent a repeat of the credit crisis that deepened when Lehman Brothers Holdings Inc. collapsed in 2008. Australia’s lenders largely stayed profitable and didn’t require bailouts during that crisis, which forced financial institutions worldwide to raise $1.6 trillion of capital amid more than $2 trillion of losses.
The facility may push up funding costs for banks by less than 10 basis points, or 0.1 percentage point, Debelle said in remarks after the speech. The benefits of the liquidity backstop will likely outweigh any such costs, he said.
“While these reforms are not costless to comply with, the benefits of a stable banking system are considerably larger,” Debelle said in his remarks to the APRA Basel III Implementation Workshop. “Both ourselves and APRA will continue to work together to promote a strong and resilient financial system.”