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APRA confirms its definition of high-quality liquid assets for the Liquidity Coverage Ratio requirement

Thursday 14 July 2016

The Australian Prudential Regulation Authority (APRA) has reviewed the range of assets that qualify for the Liquidity Coverage Ratio (LCR) for some authorised deposit-taking institutions (ADIs), and reconfirmed existing arrangements with an addition to eligible Level 1 assets.

Since 1 January 2015, ADIs subject to the LCR requirement are required to hold a stock of high quality liquid assets (HQLA) sufficient to survive a severe liquidity stress scenario lasting 30 days. There are two categories of assets that can be included in this stock:

  • Level 1 assets - limited to cash, central bank reserves and highest quality sovereign or quasi sovereign marketable instruments that are of undoubted liquidity, even during stressed market conditions; and
  • Level 2 assets (which can comprise no more than 40 per cent of the total stock) - limited to certain other sovereign or quasi sovereign marketable instruments, as well as certain types of corporate bonds and covered bonds, that also have a proven record as a reliable source of liquidity even during stressed market conditions.

Following a review of those assets that qualify for Level 1 and Level 2 assets, APRA has confirmed the existing definitions of HQLA for the LCR in Australia, which are:

  • the only assets that qualify as Level 1 assets are cash, balances held with the Reserve Bank of Australia, and Australian Government and semi government securities; and
  • there are no assets that qualify as Level 2 assets.

However, for the purposes of the LCR requirement, Australian government securities now include debt securities of the Export Finance and Insurance Corporation (EFIC). The debt securities of EFIC are high-quality marketable instruments that have a full guarantee by the Commonwealth of Australia.

APRA’s review assessed a range of marketable instruments denominated in Australian dollars against the eligibility criteria for HQLA. This assessment took a number of factors into account, including the amount of the instrument on issue, the degree to which the instrument is broadly or narrowly held, and the degree to which the instrument is traded in large, deep and active markets. APRA gives particular attention to the liquidity of the instrument during market disruptions such as occurred during the global financial crisis.

APRA will continue to review market developments in Australian dollar debt securities and vary its definition of HQLA if warranted.

The treatment of Level 1 and Level 2 assets for the purposes of the LCR requirement does not affect the set of instruments that the Reserve Bank of Australia (RBA) will accept as qualifying collateral for its committed secured liquidity facility. Qualifying collateral will comprise all assets eligible for repurchase transactions with the RBA under normal market conditions (click here for more details).

Media enquiries

Contact Ben McLean, APRA Media Unit, on +61 2 9210 3024

All other enquiries

For more information contact APRA on 1300 558 849.