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Implementation of the Basel III liquidity framework in Australia

Thursday 30 January 2014


The Australian Prudential Regulation Authority (APRA) has today released a note for authorised deposit-taking institutions (ADIs) that provides further detail on the operation of the committed liquidity facility (CLF).

In December 2010, the Basel Committee on Banking Supervision released a series of measures designed to strengthen liquidity buffers to promote a more resilient global banking system. The reforms introduce a global liquidity standard, the liquidity coverage ratio (LCR), that requires banking institutions to hold sufficient high-quality liquid assets (HQLA) to withstand a minimum of 30 days severe liquidity stress. APRA has been consulting on the implementation of the main elements of the Basel III liquidity reforms in Australia and published a final Prudential Standard APS 210 Liquidity on 20 December 2013.

Due to the relatively short supply of Australian dollar HQLA, the Reserve Bank of Australia (RBA) will allow ADIs subject to the LCR requirement to establish a secured CLF sufficient in size to cover any shortfall between the ADI’s holdings of HQLA and the requirement to hold such assets under APS 210.

In 2013, APRA undertook a trial exercise to determine the appropriate size of the CLF for each ADI subject to the LCR requirement. A total of 35 ADIs, including both locally incorporated ADIs and foreign bank branches, took part in the exercise. The note released today provides some observations arising from the exercise, as well as some changes to the process going forward.

The main observations are:

  • the RBA determined that the amount of Australian dollar HQLA that could reasonably be held by LCR ADIs was equivalent to around 30 per cent of the outstanding stock of Commonwealth Government Securities and securities issued by state and territory governments;
  • the aggregate Australian dollar net cash outflow projected by the 35 ADIs for 2014 was approximately $418 billion; and
  • had the LCR been implemented from 1 January 2014, the total notional CLF granted for 2014 would have been $282 billion.

APRA will engage further with ADIs on matters including related-party transactions, liquidity transfer pricing and the remuneration of key persons with liquidity management responsibilities. In the note, APRA has also outlined two principles for assessing the suitability of an ADI’s CLF collateral mix.

The note can be found on APRA’s website.

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $6 trillion in assets for Australian depositors, policyholders and superannuation fund members.