RBA to provide A$300 billion for committed liquidity facility

RBA contribution will ‘not materially impact' its balance sheet, says deputy Debelle; banks will pay a penalty rate to access the CLF, which will help them meet Basel III liquidity requirements

The Reserve Bank of Australia will provide A$300 billion to help Australian banks meet their liquidity requirements under Basel III through a centrally-managed committed liquidity facility (CLF), assistant governor Guy Debelle said in a speech today.

Addressing the Australian Financial Markets Association, Debelle said that the committed liquidity facility will not materially impact the size of the central bank's balance sheet. In addition to a commitment fee of 15 basis points, the banks will also incur a penalty of 25bp above the cash rate target in accessing liquidity.

He said: "Twenty-five basis points has long been the penalty rate attached to the bank's liquidity facility and it is designed to discourage ADIs [authorised deposit-taking institutions] from relying upon the facility for funding purposes during normal times."

Debelle further discussed the importance of the 15bp fee for access to the facility, which will further disincentivise banks from depending on the CLF for liquidity purposes. Without the fee, banks that are already using the RBA's discount facility can only use government securities for repo operations.

"Any ES [exchange settlement] balances acquired from the bank's liquidity facility will always represent the exchange of one liquid asset for another and cannot improve an ADI's compliance with the liquidity standard," Debelle said.

The Australian Prudential Regulatory Authority (Apra) released the implementation framework of the CLF on August 8. Banks will have to apply for inclusion to the CLF on an annual basis and ensure they have taken all "reasonable steps" towards meeting the liquidity coverage ratio (LCR) from their respective balance sheets before relying on the CLF.

The proportion of the CLF allocated to each bank will be a function of its net Australian dollar cash outflow and a buffer, revised annually, based on the banks' liquidity risk management framework.

Craig Davis, a Sydney-based partner in KPMG's financial risk practice, said the regulator remains cautious to ensure that banks don't rely on the CLF as a source of high-quality liquid assets. He said that given the emphasis the CLF has on Australian dollar cash liquidity alone, banks will have to make sure they hold central bank repo-eligible securities for the purposes of the LCR.

"Banks will still have to hold liquid assets, but the assets they hold above the Basel Committee's level 1 assets have to be repo-eligible," said Davis.

Under the Basel III liquidity rules, level 1 assets that fall under the high-quality asset category for the LCR include cash and investment-grade government securities. Level 2 assets include corporate bonds, residential mortgage-backed securities and unencumbered equities.

Apra will release a list of repo-eligible securities later this year after conducting a scenario-based analysis of the expected liquidity shortfall of authorised deposit-taking institutions over the course of 2013. The CLF is expected to go into effect in January 2015, when Australia is expected to enact the Basel III liquidity requirements.

Australia is the only jurisdiction to enact a liquidity window specifically for providing high-quality liquid assets for Basel III, given the inadequacy of government securities in the country. Debelle said that given that repo-eligible securities will be broader than the supply of government securities, the CLF "addresses the problem of there being insufficient securities for ADIs to hold that meet the Basel III standards".

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