Liquidity - frequently asked questions

APS 210 Attachment A paragraphs 9, 10 and 12 provide that HQLA1, HQLA2A and HQLA2B are limited to the types of assets listed in the respective paragraphs. Additionally, paragraphs 10 and 12 provide that an ADI may include the assets listed as HQLA2A or HQLA2B (respectively) 'where these assets have been recognised by APRA or the relevant prudential regulator in the jurisdiction where the liquidity risk is taken.' These provisions should be read to mean that the ADI is permitted to include assets of the relevant type if either APRA or the relevant foreign regulator has recognised the assets for that purpose. Similarly, APRA considers that it would be reasonable for an ADI to refer to statements made by the relevant prudential regulator in the jurisdiction where the liquidity risk is taken to clarify any uncertainty about whether a particular asset qualifies for treatment as HQLA1 under paragraph 9.

If the offshore regulator recognises the type of asset in a higher category of HQLA to that in APS 210, the ADI must apply the HQLA classification in APS 210. For example, European regulations consider some covered bonds to be HQLA1. However, APS 210 classifies qualifying covered bonds as HQLA2A. Covered bonds classified as HQLA1 under European regulations should be reported as HQLA2A in an ADI’s all-currencies liquidity coverage ratio (LCR).

Where a type of asset is listed for a higher category of HQLA in APS 210 but the offshore regulator recognises the type of asset in a lower category of HQLA to that in APS 210, APRA considers that it would be reasonable to apply that lower category of HQLA to the asset. As an example, United States (US) regulations treat all qualifying corporate bonds as HQLA2B regardless of rating, whereas APS 210 classifies qualifying corporate bonds rated AA- or higher as HQLA2A. Qualifying US corporate bonds should be treated as HQLA2B in the ADI’s all-currencies LCR.

As stated in APRA’s 14 July 2016 media release, there are currently no Australian dollar assets that qualify as HQLA2A or HQLA2B.

Reference:

• APS210, Attachment A, paragraph 35

Except in a situation where an ADI is insolvent or no longer holds an authority from APRA to carry on banking business, or where the law requires it, APRA considers that it would be inconsistent with the requirements of APS 210 Attachment A paragraph 35 for provisions to: 

a) allow the intermediary to withdraw funds or terminate the deposit agreement within 30 days (other than withdrawals in respect of normal fees, expenses and payment of relevant taxes, if any); or

b) prevent an intermediated deposit from remaining with an ADI for the next 30 days (including provisions that require or allow the ADI’s deposit products to be removed from a menu of deposit products such that a deposit with the ADI maturing within the next 30 days cannot be reinvested with the ADI).

References:

• APS210, Attachment A, paragraph 35
• APS 210, Attachment C paragraphs 12(b), 13(b) and 14(d)
• Liquidity FAQ 2

Intermediated deposits are to be treated for the purposes of the NSFR in a manner that is consistent with the way that they are treated for the purposes of the LCR (and FAQ 2 above), except that the intermediary is required to give at least six or twelve months’ notice (as opposed to more than 30 days’ notice) under any withdrawal or termination provisions (as set out in APS 210 Attachment C paragraphs 12(b), 13(b) and 14(d)). 

Except in a situation where an ADI is insolvent, or no longer holds an authority from APRA to carry on banking business, or where the law requires it, APRA considers that it would be inconsistent with the requirements of paragraphs 12(b), 13(b) and 14(d) for provisions to:

a) allow the intermediary to withdraw funds or to terminate the deposit agreement within the relevant six or twelve months’ notice period (other than withdrawals in respect of normal fees, expenses and payment of relevant taxes, if any); or

​​​​​​b) prevent an intermediated deposit from remaining with an ADI for the next six or twelve months (including provisions that require or allow the ADI’s deposit products to be removed from a menu of deposit products such that a deposit with the ADI maturing within the next six or twelve months cannot be reinvested with the ADI).

They should be reported as deposits from the underlying person(s).

Archived - Liquidity frequently asked questions.

References:

• APS 210 Attachment A paragraph 34
• APG 210 paragraph 114

APS 210 Attachment A paragraph 34 specifies that retail deposits are deposits from natural persons. Personal investment entities (PIEs) are considered to be Financial Institutions, defined in APS 001, as they are engaged substantively in funds management. Therefore, deposits from PIEs do not qualify as retail.

However, APG 210 paragraph 114 provides guidance as to when PIEs can be considered to be retail depositors. This is where the investment entities are operated and controlled by a small number of related individuals, solely for the personal benefit of those same individuals, with the trustee and/or manager also being a beneficiary. 

APRA has found that the qualitative guidance set out in APG 210 paragraph 114 has been interpreted inconsistently by ADIs. Further, in some cases ADIs had insufficient information to determine whether or not PIEs had the characteristics described in APG 210 paragraph 114. Where this is the case, the PIE deposits could still be reported as retail where they are below a reasonable dollar threshold that can be employed as an indicator of the number of individuals involved and the level of sophistication of the individuals controlling the investment decisions. APRA suggests $2 million is an appropriate threshold*. Where an ADI has insufficient information and the PIE deposits are at or above this threshold, APRA would expect the deposits to be reported as Financial Institution deposits.

If an ADI does have sufficient information to determine that the PIE is of the kind described in APG 210 paragraph 114, APRA considers it would be prudent for ADIs to also use reasonable dollar thresholds as likely predictors of depositor behaviour in order to classify the deposits. In this regard: 

-    deposits from the PIE could be reported as retail only if they are less than $2 million in total. 
-    if deposits from the PIE are equal to or greater than $2 million in total but less than $20 million, the deposits could be reported as deposits from a non-financial corporate. 
-    if deposits from the PIE are equal to or greater than $20 million in total, APRA would expect the deposits to be reported as deposits from a financial institution.
 
If an ADI determines that the PIE is not of the kind described in APG 210 paragraph 114, APRA would expect the deposits to be reported as deposits from a financial institution, regardless of the size of the deposits.

*This matches the maximum SME size which may be considered retail under APS 210 Attachment A paragraph 46(b).

To meet the requirements for an intermediated deposit under APS 210 Attachment A paragraph 35, the ADI does not need to know the personal details of the customer of the intermediator but should know the amount of each customer’s deposit and the customer’s category (i.e. natural person, SMSF, PIE, corporate, financial institution) at all times.

Yes, the definition is the same for all forms and can be found in the ARS 210 paragraph 21 as follows:

"Small and medium enterprise (SME) has the meaning given in paragraph 46 and footnote 7 of Attachment A of Prudential Standard APS 210 Liquidity."

Accrued interest receivable/payable links to the required/available stable funding of its associated asset/liability. This is consistent with the carrying value of an asset/liability which includes its accrued interest.

Under the NSFR, open repos should be reported as follows:

• report the amount borrowed in the < 6 months maturity bucket of item 11 Funding from central banks. ASF factor of 0 applies;
• report the cash received from the RBA in the < 6 months maturity bucket of item 21 Central bank reserves and balances. RSF factor of 0 applies; and
• report the encumbrance of self-securitised assets in the open repo transaction in the < 6 months maturity bucket of item 27.2.1 Encumbered CLF-eligible self-securitised assets.

APRA has reviewed the BCBS FAQs and does not believe they conflict with APRA’s standards or guidance. However, depending on the circumstances, this may not always be the case. If a BCBS FAQ conflicts with an APRA standard or guidance in the circumstances contemplated by the ADI, the ADI may not rely on the BCBS FAQ. If the ADI is uncertain, it should either contact APRA or not rely on the BCBS FAQ.

* See the BCBS June 2017 publication "Basel III – The Liquidity Coverage Ratio framework: frequently asked questions" and the July 2017 publication "Basel III – The Net Stable Funding Ratio: frequently asked questions" - both available on the Bank for International Settlements website.

Under APS 210 paragraph 71, an ADI must contact APRA if it seeks to place reliance, for the purpose of complying with APS 210, on a previous exemption or other exercise of discretion by APRA under a previous version of the Prudential Standard. This requirement applies to both letters to industry and letters sent directly to individual ADIs.

In the case of a Minimum Liquidity Holdings (MLH) or LCR determination, ADIs should assume their status has not changed under the new version of APS 210 unless APRA specifically notifies the ADI otherwise. Similarly, where APRA has set a higher minimum liquidity requirement under paragraph 56 or 58 of APS 210, the higher requirement will continue to apply unless otherwise notified. Settlement funds placed by MLH ADIs with settlement service providers may be considered approved for a prudential purpose under APS 210 Attachment B paragraph 2 if they have been previously approved in writing by APRA.

APRA does not require MLH ADIs to establish self-securitisations. However, APRA typically expects MLH ADIs with more than $1 billion in liabilities to have a self-securitisation eligible for repo with the RBA. MLH ADIs without a self-securitisation program, especially those over $1 billion, may be required to hold more liquidity.

The self-securitisation as reported in item 18.7 of ARF 210.4 3-year Funding Plan should be no less than 10 per cent of an ADI’s total deposits (wholesale and retail) and short-term wholesale liabilities (the total of ARF 210.3.2 items 1 and 2.1.1). APRA does not expect MLH ADIs to have offshore wholesale funding, but if one does, it should also include ARF 210.3.2 items 2.2.1, 2.2.2 and 2.2.3. The 10 per cent stated above should be seen as a starting point or guide only. ADIs should conduct their own analysis of their balance sheet and potential funding volatility to determine the appropriate size.

The net proceeds from the self-securitisation (due to haircuts and ineligible assets) will be less than the gross/face amount of the self-securitisation notes. APRA expects that ADIs will actively manage their self-securitisation portfolio such that it is regularly topped up as mortgages amortise or become otherwise ineligible. Further, the ADI’s analysis for the appropriate size of its self-securitisation should consider the impact of the RBA’s haircuts and the ADI’s top up frequency.

APRA does not require regular reporting of stress test results but may request them at any time. APRA expects that ADIs would report their stress test results to APRA upon a request or upon the stress tests revealing vulnerabilities requiring further actions.

Foreign ADIs have a number of operating and support models for Australia and the region to provide liquidity to branch offices. APRA does not expect staff in Australia to work in isolation. However, staff in Australia must be able to initiate and execute both making and receiving payments. This could be done by instructing offshore centres or outsourcing partners whose operations would not be impacted by time zones or other country holidays.

As at 26 April 2018, the Australian LCR ADIs are:

AMP Bank Ltd
Australia and New Zealand Banking Group Limited
Bank of China (Australia) Limited
Bank of Queensland Limited
Bendigo and Adelaide Bank Limited
Citigroup Pty Limited
Commonwealth Bank of Australia
HSBC Bank Australia Limited
ING Bank (Australia) Limited (trading as ING)
Macquarie Bank Limited
Members Equity Bank Limited
National Australia Bank Limited
Rabobank Australia Limited
Suncorp-Metway Limited
Westpac Banking Corporation

APRA expects that a clause which allows a lender (or depositor) to accelerate repayment if the ADI is under financial stress but is still solvent and meeting its financial obligations under the program/agreement will be included in the LCR as funding that has its earliest possible contractual maturity date within the LCR horizon of 30 days. A run-off rate according to the requirements of APS 210 Attachment A paragraph 53 must then be applied. Similarly, APRA expects for NSFR purposes that the ADI will assume a residual maturity of less than six months, being the earliest date at which the funds under the funding agreement containing the relevant acceleration clause may be redeemed, and assign an ASF factor in accordance with the requirements of APS 210 Attachment C paragraph 15. 

The clauses that were of concern allow the lender (or depositor) to accelerate maturity, making funds owed under the funding agreement immediately due and payable (regardless of the maturity date) upon the borrowing ADI hitting a particular trigger or coming under (or potentially coming under) stress. Such clauses could allow the lender (or depositor) to withdraw funds when they are most needed by the borrowing ADI. Further, the funds might be withdrawn in priority to other creditors, including retail depositors. Examples of such clauses include, but are not limited to: 

• any material adverse change of the borrowing ADI which could affect the ability of the borrowing ADI to satisfy its obligations; 
• meeting a specified market-based or similar trigger (for example, hitting a credit default swap spread or equity price), regardless of the likelihood of meeting that trigger;
• any representation or warranty made at issuance later becomes untrue or misleading either when made or repeated; 
• a downgrade in excess of 3 notches in the borrowing ADI’s long-term credit rating; and 
• any litigation or governmental investigation or proceeding pending or threatened against the borrowing ADI.

APRA appreciates the difficulty of precisely prescribing whether a clause will result in the funding being included within the 30-day horizon of the LCR. APRA expects ADIs to apply a robust process of challenge to such a determination. However, at a high level, a clause that potentially triggers early repayment where the ADI is still meeting its financial obligations under the facility, has not failed and continues to operate as an ADI should warrant careful scrutiny. If the ADI remains in doubt, it should send a query to APRA rather than risk a potential breach of the requirements in APS 210. 

In addition to consideration of the appropriate LCR and NSFR requirements in APS 210, if an ADI has a term or condition in a funding agreement with a related entity which is not typically contained in its external funding programs and agreements, the ADI should also consider the requirements of APS 222 paragraph 9.

The only AUD assets that qualify as HQLA1 are notes and coin, balances held with the Reserve Bank of Australia, and Australian Government and semi-government securities. There are no AUD assets that currently qualify as HQLA2.

Australian Government securities include any debt securities issued by the Export Finance and Insurance Corporation, and, the National Housing Finance and Investment Corporation, provided that they are fully and unconditionally guaranteed by the Commonwealth of Australia.

For the purpose of calculating the LCR on an “all currencies” basis, surplus liquid assets in a currency are liquid assets (HQLA, RBNZ eligible securities and ALA, as applicable) that are in excess of net cash outflows (prior to applying the inflow cap) in that currency. 

To the extent that surplus liquid assets in one jurisdiction or currency would not be freely available to meet outflows in other jurisdictions or currencies in times of stress, APRA expects that an ADI will exclude these liquid assets from reporting in Section A: Liquid assets of reporting form ARF 210.1A Liquidity Coverage Ratio – all currencies (Level 1 and Level 2). In such cases, the ADI should include liquid assets in that jurisdiction or currency in the order of most liquid to least liquid, that is, HQLA1 first, then HQLA2A, HQLA2B and finally ALA, up to the amount of net cash outflow in that jurisdiction or currency. 

When reporting the LCR for a single currency under item “35. LCR for significant currencies” in reporting form ARF 210.1A, the above approach would not apply and an ADI should include all liquid assets in that currency.

[1]Refer to paragraph 43 and paragraphs 24 and 29 of Attachment A to APS 210 Liquidity, and paragraphs 28 to 32 of APG 210 Liquidity.

APRA views such an arrangement, whether packaged together as a single product or separate products, as functionally the same as an at-call deposit. To accord with the spirit and intent of the Standard, APRA expects such arrangements (whatever their purpose) to be treated by ADIs as at-call deposits under the LCR and NSFR. 

Broadly, any arrangements by ADIs which seek to provide FI customers with immediate or at call access to funds deposited or loaned to the ADI while excluding those funds from the ADI’s LCR calculation or reporting those funds as stable in the ADI’s NSFR do not meet the spirit and intent of the Standard. Such arrangements, however structured, should be treated as at-call funding. 

Term or minimum notice deposits from non-FI customers to secure future utilisation of the undrawn amount of a credit or liquidity facility should be treated as two stand-alone products for the purposes of the LCR and NSFR, based on the features of the product and the nature of the retail customer. 

Under paragraph 42 of Attachment A of APS 210, an ADI may allow depositors experiencing hardship to withdraw their term deposits without changing the treatment of the entire pool of deposits.
 
ADIs are allowed to accept term deposit break requests from depositors experiencing hardship. This paragraph applies to all depositor types, it is not limited to retail depositors. Given the current environment, APRA will not require a policy defining hardship for all customer types in cases where such a policy does not currently exist.

References:

• APS 210, paragraphs 57 and 58.

APRA may consider an increase to a locally-incorporated MLH ADI’s minimum liquidity holdings if the ADI evidences elevated liquidity risk. That evidence may include, but is not limited to:

• not having access to emergency liquidity, such as from a self-securitisation, membership in an industry support scheme or an unconditionally committed facility from an investment grade entity;
• an ADI using more than an immaterial amount of short-term wholesale funding as a proportion of its total funding; or
• other factors which APRA believes may increase an ADI’s funding volatility or liquidity risk, such as concentrations in funding providers, increasing deposits of a less stable nature, or holding lower quality liquid assets.

Total funding is “Total liabilities and capital” as reported in ARF 210.3.2 item 8. Short term wholesale funding is calculated as the sum of the closing balance (column 1 in ARF 210.3.2) for all funding categorised in ARF 210.3.2 as coming from non-financial corporates, PSEs, ADI/Banks, other financial institutions, other legal entities, repo, short-term securities, and short-term securitisations.

APRA does not have strict, pre-determined parameters or formulae in place to calibrate increases in minimum liquidity holdings and will take into account the risks, available mitigants, and other factors which may be relevant.

References:

• ARF 210.3.2 items 3.1.3, 3.2.3, 3.1.4 and 3.2.4

The treatment depends on the terms of the warehouse facility upon non-renewal or termination. If such a situation (non-renewal or termination of the facility) can result in a default of the relevant Special Purpose Vehicle (SPV), loss of mortgages, or undue pressure on the sponsoring ADI to unwind the warehouse facility at or within 12 months of the termination or non-renewal of the facility (at any time during a calendar year), the warehouse facility should be classified as short-term wholesale funding and reported in either item 3.1.3 or 3.2.3 of ARF 210.3.2. Otherwise, the warehouse facility should be treated as long-term wholesale funding and reported in either item 3.1.4 or 3.2.4 of ARF 210.3.2. For example, a warehouse facility which has a longer than 12 month amortisation period upon non-renewal or termination would be considered long-term.

For the avoidance of doubt, APRA would not consider a step-up margin, payable by the ADI to the warehouse SPV, as undue pressure unless it resulted in:

1. the SPV having insufficient cash flows to meet its obligations;
2. the sponsoring ADI becoming a net payer (on an ongoing basis) on its basis swap; 
3. the ADI being required to raise the underlying borrowers’ interest rates: or
4. an outcome similar in nature to those outlined in (1) to (3).

Paragraph 53 of Attachment A to APS 210 requires collateral outflows due to market valuation changes on derivative and other transactions to be calculated as 100 per cent of the largest absolute net 30-day collateral flow realised in the past 24 months (“the standard method”). Footnote 6 of APS 210 states that an ADI may, in certain circumstances, apply to APRA for approval to use an alternative method to that specified in paragraph 53.

APRA recognises that in certain circumstances an ADI may receive substantial collateral inflows due to market valuation changes on its derivatives during a period of severe stress (“right way risk”). Despite an improvement in the ADI’s liquidity position due to the inflows, the calculated collateral outflow in the LCR may increase under the standard method, negating a potential improvement in the LCR. This may result in the ADI’s LCR not reflecting its true liquidity position. In order to address this issue, the ADI may wish to apply to APRA for approval to use an alternative method. APRA would likely approve an alternative method that adjusts the collateral outflow calculated under the standard method to exclude the undue impact of right way risk.

The most efficient way for ADIs to obtain approval to use such an alternative method would be to submit to APRA a proposal in conjunction with the annual committed liquidity facility application to fix the outflow at a particular amount for the next calendar year. APRA would expect the proposed fixed outflow to be based on the collateral outflow that is calculated under the standard method, excluding right way risk inflows from periods of severe stress (such as during the COVID-19 crisis or global financial crisis). Accordingly, in most years, APRA would not expect there to be exclusions from the calculation of the collateral outflow under the standard method.      

APRA expects that an ADI will regularly monitor whether the fixed outflow adequately reflects the risk of collateral outflows on its derivative and other transactions during a period of stress. An ADI should notify APRA immediately if it determines that this is not the case.

References:

• ARF 210.1A, items 9.2, 9.3, and 9.5
• ARF 210.1B, items 9.2, 9.3, and 9.5
• ARF210.3.1, items 6.1.3, 6.2.3, 6.1.5 and 6.2.5
• ARF 210.3.2, items 1.1.3, 1.1.5, 1.2.3 and 1.2.5
• ARF 210.4, items 6.1.3, 6.1.5, 6.2.3, 6.2.5, 9.1.3, 9.1.5, 9.2.3 and 9.2.5
• ARF 210.5, items 2.2, 2.3,6.2, and 6.3
• ARF 210.6, items 9, 10, and 12
• APS 001 Definitions
• APS 210 Attachment A paragraph 53 Table 3 
• APS 210 Attachment C paragraph 14(e)

APRA considers that deposits from national, state, territory and local governments (and their borrowing authorities), central banks, multilateral development banks/national development banks, the Future Fund and each Australian state’s and territory’s main investment entity should be reported under item 9.3 in ARF 210.1A and ARF 210.1B, items 1.1.3 and 1.2.3 in ARF 210.3.2, items 9.1.3 and 9.2.3 in ARF 210.4, items 2.2 and 6.2 in ARF 210.5 and item 10 in ARF 210.6 (other than central banks which get reported in item 11).

Deposits from other entities of national, state, territory and local governments are expected to be reported as a financial institution under item 9.5 in ARF 210.1A and ARF 210.1B, items 1.1.5 and 1.2.5 in ARF 210.3.2, items 9.1.5 and 9.2.5 in ARF 210.4, items 2.3 and 6.3 in ARF 210.5 and item 12 in ARF 210.6 unless they are not a sovereign wealth fund (or similar) of another country, and either

         o    they do not meet the definition of a Financial Institution under APS 001, or
         o    their primary activities do not compete with private sector entities,

in which case they should be reported as a Non-financial corporate under item 9.2 in ARF 210.1A and ARF 210.1B, items 1.1.3 and 1.2.3 in ARF 210.3.2, items 9.1.3 and 9.2.3 in ARF 210.4, items 2.2 and 6.2 in ARF 210.5 and item 9 in ARF 210.6.

For consistency with the above, the same reporting classifications are expected to be used for items 6.1.3, 6.2.3, 6.1.5 and 6.2.5 in ARF 210.3.1 and 6.1.3, 6.2.3, 6.1.5 and 6.2.5 in ARF 210.4.

References:

• APS 210, Attachment A, paragraph 35 
• APS 210 Attachment A, paragraph 40, Tables 1 and 2
• APS 910

Where the intermediated deposit is not or is only partially covered by the FCS*, the following scores should be applied against the government deposit guarantee limit criteria in the scorecard:

•  Zero for the amount of the underlying customer’s balance that is less than or equal to $250,000;
• Two points for the amount of the underlying customer’s balance above $250,000.

* The intermediated deposit may only be partially covered where the depositor (the intermediary) has a deposit balance that is larger than the FCS limit of $250,000 (the deposit balance being the aggregate of much smaller placements of funds by the underlying customers of the intermediary). For example, the FCS limit of $250,000 may be applied to an intermediary’s deposit balance of $500m, which represents the aggregation of smaller placements of funds by thousands of customers of the intermediary. This would result in only a very small portion of each underlying customer’s balance being covered by the FCS.