The shape of the new prudential management system for Australia’s banks and financial system generally is taking its final shape and should be finalised next year.
The two main regulators, APRA yesterday released details of the new system.
The changes are in response to the so-called Basel Three rules designed to try and avoid a repetition of the global financial crisis that saw banks lose trillions of dollars around the world, with many needing bailouts from national governments.
Banking analysts say you can see how the country’s banks, especially the big four, are already preparing for these changes.
On Tuesday the Commonwealth revealed it had added another $8 billion in liquidity to its pool of funds in the September 30, to take the amount to $109 billion.
And the big banks have been buying more mortgage backed securities from one another in the past few months to build up the pools of approved securities for the new liquidity and funding ratios to be introduced by regulators and for possible sale to the RBA in times of stress when accessing the planned new liquidity facility.
Yesterday the ANZ said it had sold $1.25 billion of covered bonds (which are backed by mortgages) in the US in the first such sale by a local bank since the laws were changed to allow these sorts of securities to be sold.
The Commonwealth bank is said to be nearing a similar sale of around $1.33 billion.
These deals are important because the banks will be able to sell up to 8% if their assets in these bonds, which will count as high liquidity assets under the proposed changes to bank liquidity and funding rules.
Building up liquidity will involve the banks in forgoing profits as the surplus cash won’t be able to be loaned to customers.
Australia’s position is different to other countries in that we have a low level of issued Government debt, which is insufficient to provide the liquidity needed for the banks under the new system.
So mortgage backed securities, some corporate bonds, covered bonds and other high grade securities can be used instead of the government securities.
But they still won’t be enough to provide enough high quality assets for the new liquidity and stable funding rules.
So a key part of the new structure will be a facility provided by the Reserve Bank to ensure commercial banks have enough liquidity in times of financial crisis, such as we saw in the last quarter of 2009 and early 2009 when the GFC was at its most intense.
Called the Committed Liquidity Facility (CLF), it will be available from January 1, 2015 and will ensure banks and other authorised deposit-taking institutions (ADI) have access to the funds they need.
The CLF is part of Australia’s response to the Basel III reforms, a new set of international banking standards being implemented to avoid a repeat of the global financial crisis (GFC).
Access to the facility will be at the discretion of the Reserve Bank of Australia (RBA) and to be eligible, the financial institution must first have received approval from the Australian Prudential Regulation Authority (APRA).
They will have pay an annual fee of 0.15% of the amount estimated by themselves and APRA, each bank will need to main its liquidity position in times of severe financial stress (30 days without any access to new funding, except the CLF).
Analysts estimate the banks will need around $100 billion of extra liquidity, on top of their existing holdings of government bonds and other highly liquid securities.
That means the banks and other groups using the CLF will have to around $150 million a year to maintain their positions with the fund.
That will continue and change only if APRA determines that the bank in question has improved its liquidity position.
If banks and other groups (so-called authorised deposit taking institutions, or ADIs) want to access the CLF in times of stress, they can only do so after approval from APRA.
The RBA will also charge them to access the fund, and will then levy discounts (called ‘haircuts in finance) on the securities the ADI will use as collateral for the funding.
That way the RBA protects its financial position and guards against credit risk
APRA chairman John Laker said yesterday the Basel III liquidity reforms will further strengthen the Australian banking system.
"APRA’s objective is to strengthen the resilience of ADIs to liquidity risk and improve APRA’s ability to assess and monitor ADIs liquidity risk profiles.
"These reforms build upon APRA’s 2009 proposals for a stronger liquidity management regime in our banking system," he said in the statement.
He said that the Basel III liquidity reforms address a number of weaknesses in liquidity risk management that came to light during the global financial crisis.
APRA said it will apply the new global liquidity standards to the larger authorised deposit-taking institutions (ADIs), such as the big four banks.
"These new standards are the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR).
"However, APRA does not intend to apply these standards to ADIs that are subject to a simple quantitative metric, the minimum liquidity holdings (MLH) regime (smaller financial groups).
"The enhanced qualitative requirements will apply to all ADIs in Australia."
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