Under PAR, banks were required to hold a minimum level of high quality liquid assets, in the form of Commonwealth Government securities, State Government securities, notes and coins, and balances with the Reserve Bank. The requirement was introduced to help banks cope with emergency demands on their liquidity. The ratio had been reduced in stages, reflecting the reduced availability of Government securities, and had been 3 per cent since June 1997. It was noted at the time of the last reduction that new prudential guidelines would be put in place to deal with liquidity management by banks.

A new Prudential Statement on Liquidity Management was issued in April 1998. It places greater emphasis on banks' internal management practices and requires banks to have systems in place to manage liquidity under different scenarios, including normal day-to-day operations and a bank-specific ("name") crisis. In particular, banks must be able to demonstrate that they would have sufficient liquidity to keep operating for at least five business days under a "name" crisis. Banks can use a range of strategies to manage liquidity, including holding liquid assets, setting limits on maturity mismatches, diversifying liability sources and developing asset sale strategies. It was foreshadowed at the time of release of the new prudential statement that PAR would be removed when each bank's liquidity management policies had been agreed individually with APRA.

Credit unions and building societies continue to observe liquidity requirements established under the State-based Financial Institutions Scheme. APRA will be reviewing those arrangements as part of its intended harmonisation of prudential guidance for all authorised deposit-taking institutions.

Prudential Statement D1 is available on APRA's web site.

Enquiries:

Les Phelps
Executive General Manager
Authorised Deposit-Taking Institutions