APRA releases second consultation package on Basel III liquidity reforms

The Australian Prudential Regulation Authority (APRA) has today released a second consultation package outlining its proposed implementation of the Basel III liquidity reforms for authorised deposit-taking institutions (ADIs) in Australia.

The package includes a discussion paper, a revised draft Prudential Standard APS 210 Liquidity (APS 210) and a draft Prudential Practice Guide APG 210 Liquidity. The package addresses the main issues raised in submissions to APRA’s previous discussion paper released in November 2011, and incorporates revisions to the Basel III liquidity reforms published by the Basel Committee on Banking Supervision (Basel Committee) in January 2013.

In the 2011 discussion paper, APRA outlined proposals to implement the Basel III liquidity reforms. These proposals included two new quantitative measures — a 30-day Liquidity Coverage Ratio (LCR) to address an acute stress scenario and a Net Stable Funding Ratio (NSFR) to encourage longer-term funding resilience. These requirements would apply to those ADIs that are currently required to conduct scenario analysis of their liquidity needs under different operating circumstances. This approach is unchanged in the updated draft APS 210.

In the 2011 paper, APRA also proposed that ADIs currently subject to the simple quantitative liquidity ratio requirement, the minimum liquidity holdings (MLH) regime, would not be subject to either of the two new Basel III global standards. In response to submissions, APRA has made minor adjustments to the MLH regime.

The recent revisions to the LCR announced by the Basel Committee include discretion for national authorities to include a wider range of liquid assets in the definition of high-quality liquid assets (HQLA), some refinements to the assumed cash inflow and outflow rates, and a revised timetable for phase-in of the LCR. In the package released today, APRA is not proposing to exercise discretion to widen the definition of HQLA; hence, the definition of HQLA in the updated draft APS 210 is unchanged.

In addition, APRA is proposing to implement the liquidity reforms on the previously published timetable. APRA acknowledges this is a conservative approach, but one that is fully consistent with the capabilities and needs of the Australian banking system. Accordingly, the Liquidity Coverage Ratio will become effective from 1 January 2015 and the Net Stable Funding Ratio from 1 January 2018.

The discussion paper released today also includes responses to the main issues raised in submissions on APRA’s 2011 proposals that have not been affected by the Basel Committee’s recent revisions.

APRA Chairman Dr John Laker said that, in implementing the Basel III liquidity reforms, APRA’s objectives are to strengthen the resilience of the Australian banking system and improve APRA’s ability to assess and monitor ADIs’ liquidity risk.

‘APRA believes ADIs are well-placed to meet the new liquidity requirements on the original timetable and doing so will send a strong message about the soundness of the Australian banking system.’

The discussion paper, draft prudential standard and draft prudential practice guide can be found on APRA’s website.