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Harmonisation of Prudential Standards for Authorised Deposit-taking Institutions - LIQUIDITY

21 Dec 1999

The Australian Prudential Regulation Authority (APRA) today released for comment a draft prudential standard on Liquidity Management for all Authorised Deposit-taking Institutions (ADIs). Draft guidance notes, providing details of how it will be applied, are attached to the standard.

When APRA assumed responsibility for bank supervision on 1 July 1998, it adopted, for the interim, the Prudential Statements previously issued by the Reserve Bank in relation to the supervision of banks. The Prudential Statements establish the minimum prudential standards which banks are required to observe. On 1 July 1999, APRA became responsible for the prudential regulation of building societies, credit unions and special service providers. These were previously regulated under the Financial Institutions (FI) Scheme, a uniform scheme of regulation implemented by each State and Territory government and coordinated by the Australian Financial Institutions Commission (AFIC). As a transitional measure, the Financial Sector Reform (Amendment and Transitional Provisions) Regulations 1999 (FSR Regulations) preserved the bulk of the FI Scheme prudential standards as APRA transitional prudential standards, to be observed by transferring institutions. It was envisaged that, after the transitional period, APRA would revise these transitional standards with a view to developing a harmonised set of Banking Act prudential standards covering all ADIs.

The process of harmonisation is currently under way. The initial aim is the creation of a single and consistent set of prudential rules for all deposit-takers. We expect that this process can be completed by mid 2000. This will represent only the first step, however, in a process that will see further evolution in the prudential framework covering ADIs (as well as other types of financial institutions) over time. As we proceed down this path we are keen to encourage an ongoing dialogue with the industry on the medium- and longer-term issues that will need to be addressed. Care is being taken to ensure that the initial harmonised standards do not compromise any longer-term objectives or plans and are sufficiently flexible to accommodate innovations in the industry, and in the way that supervision of ADIs is conducted, in the immediate future.

For the moment, the draft liquidity standard for ADIs retains the main features of Prudential Statement D1 (PS D1) for banks on liquidity management and the FI Scheme risk management standard on liquidity risk for building societies, credit unions and special service providers. Accordingly, when the standard becomes effective, ADIs that currently meet PS D1 or the minimum on-balance sheet liquidity requirements specified under the FI Scheme standard, will be deemed compliant with the harmonised standard. APRA will review each ADI's liquidity management strategy, in terms of the harmonised standard, as part of its normal supervisory arrangements.

The draft harmonised standard provides for an ADI to select among procedures for liquidity management. An ADI wishing to change its present liquidity management methodology should, after the harmonised standard is in place, notify APRA of its intention to do so. The ADI will need to provide full details of its liquidity management strategy prior to setting up review arrangements with APRA.

The draft harmonised liquidity standard and guidance notes for ADIs, as well as PS D1 and the FI Scheme prudential standard on liquidity risk, are available on the APRA website. Other draft harmonised prudential standards and guidance notes will be progressively released to industry for comment over the next few months.

Please forward comments on the proposed liquidity standard and guidance notes by 15 February 2000 to:

Mr Brian Gray
Executive General Manager
Policy, Research and Consulting
Australian Prudential Regulation Authority
GPO Box 9836
Sydney NSW 2001

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