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Implementation of the Basel III liquidity framework in Australia

8 Aug 2013
13.25

The Australian Prudential Regulation Authority (APRA) has today released a note for authorised deposit-taking institutions (ADIs) providing further detail on its approach to the implementation of the Basel III liquidity framework and, in particular, on the operation of the committed liquidity facility (CLF).

In December 2010, the Basel Committee on Banking Supervision released a series of measures designed to strengthen liquidity buffers to promote a more resilient global banking system. APRA has been consulting on the implementation of the main elements of the Basel III liquidity reforms in Australia. The reforms introduce a global liquidity standard, the liquidity coverage ratio (LCR), that requires banking institutions to hold sufficient high-quality liquid assets (HQLA) to withstand a minimum of 30 days severe liquidity stress.

Due to the relatively short supply of Australian dollar HQLA, the Reserve Bank of Australia (RBA) will allow ‘scenario analysis’ ADIs to establish a secured CLF sufficient in size to cover any shortfall between the ADI’s holdings of HQLA and the requirement to hold such assets under the LCR.

The note released today provides details on APRA’s role in determining the appropriate size of the CLF for each scenario analysis ADI. The main steps in the process are:
  • ADIs will be required to apply for inclusion of a CLF for LCR calculation purposes on an annual basis;
  • ADIs will be required to demonstrate they have taken ‘all reasonable steps’ towards meeting their LCR requirements through their own balance sheet management, before relying on the CLF;
  • ADIs must meet relevant qualitative and quantitative liquidity requirements, including having in place a statement of the Board’s tolerance for liquidity risk, an appropriately robust liquidity transfer pricing mechanism, and appropriate remuneration arrangements for those executives responsible for the ADI’s funding plan and liquidity management;
  • the CLF will be available to address Australian dollar liquidity needs only; and
  • the size of the CLF for each ADI will be limited to a specified percentage of that ADI’s Australian dollar net cash outflow target as agreed by APRA, plus an allowance for an appropriately sized buffer.

The note can be found on APRA’s website at: www.apra.gov.au/adi/Publications/Pages/other-information-for-adis.aspx

APRA is undertaking a trial exercise with all scenario analysis ADIs in 2013. APRA will release further details on the CLF process once it has completed this exercise.

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry. APRA is funded largely by the industries that it supervises. It was established on 1 July 1998. APRA currently supervises institutions holding $4.2 trillion in assets for almost 23 million Australian depositors, policyholders and superannuation fund members.

Media and industry enquiries only:

Andrew McCutcheon
APRA Media Unit
Telephone: 02 9210 3636 
 
All other enquiries:

APRAinfo: 1300 558 849