APRA releases consultation package on implementation of Basel III liquidity reforms

The Australian Prudential Regulation Authority (APRA) has released for consultation a discussion paper outlining its proposed implementation of the Basel III liquidity reforms in Australia.

The discussion paper and draft Prudential Standard APS 210 Liquidity (APS 210) incorporate the Basel III liquidity reforms released by the Basel Committee on Banking Supervision in December 2010 and enhanced qualitative requirements outlined in the Basel Committee’s Principles for Sound Liquidity Risk Management and Supervision released in September 2008.

APRA has been actively involved in developing these global liquidity reforms and fully supports their implementation in Australia. Accordingly, APRA proposes to apply the new global liquidity standards to the larger authorised deposit-taking institutions (ADIs). 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. The enhanced qualitative requirements will apply to all ADIs in Australia.

APRA Chairman John Laker 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 and their implementation in Australia 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.

APRA is proposing to follow the Basel Committee’s timetable for the implementation of the new global liquidity standards. Accordingly, the LCR requirement will become effective from 1 January 2015 and the NSFR requirement from 1 January 2018. APRA is also proposing that the qualitative requirements outlined in this package become effective when the revised APS 210 is implemented.

Concurrent with this release, the Reserve Bank of Australia (RBA) has today provided further detail on the committed liquidity facility that will be available to ADIs subject to the LCR requirement. The RBA has announced the commitment fee on the facility and has provided clarification of the securities that will be eligible as collateral for the facility. APRA will be reviewing each ADI’s liquidity risk management framework as the basis for approving the amount of the RBA facility that can be recognised for LCR purposes. In doing so, APRA will have regard to the composition and diversification of securities held as collateral for the facility.

Following consideration of submissions received on this paper, APRA intends to publish a final Prudential Standard APS 210 Liquidity in mid-2012. APRA will undertake consultation in early 2012 on the detailed reporting requirements associated with the Basel III liquidity reforms in Australia.

The discussion paper and draft prudential standard can be found on APRA's website.