RBA and APRA agree to banking liquidity framework

The Reserve Bank of Australia (RBA) and the Australian Prudential Regulation Authority (APRA) have agreed to help authorised deposit-taking institutions (ADI) adhere to new liquidity requirements.

Australia is one of a few jurisdictions that has a limited supply of Government securities and non-bank corporate debt. Although the new international standard for liquidity risk, announced yesterday by the Basel Committee on Banking Supervision, requires that the bulk of high-quality liquid assets in most jurisdictions will take the form of holdings of Government debt, the framework has allowed for “alternative treatments for the holding of liquid assets”. One of these alternatives is to allow banking institutions to establish contractual committed liquidity facilities provided by their central bank.

The RBA and APRA stated that they agreed to this approach, which would enable an ADI to establish a committed secured liquidity facility with the RBA that could cover any shortfall between its holdings of high-quality liquid assets and the new requirements. The RBA stated that a ‘commitment fee’ charged to the ADI would leave it with the same set of incentives to prudently manage its liquidity as one of its counterparts — in jurisdictions where there was an adequate supply of high-quality liquid assets.

The new Basel liquidity requirements come into play in January 2015, and details of the RBA’s liquidity facility and APRA’s prudential standard on liquidity risk management will be open to consultation in 2011 and 2012.