Weaker liquidity rules may benefit lenders
To protect the world economy from future financial shocks, regulators plan to force banks to hold larger amounts of safe assets such as top-rated government bonds.
But on Monday, in a welcome development for overseas banks, global regulators said they would water down the liquidity rules so banks could hold more assets that pay higher returns, including shares and corporate bonds.
The reforms will also be phased in more slowly over the four years to 2019, amid complaints the changes would crimp lending and strangle recoveries overseas.
It is not clear how the back down will affect Australia, as the local regulator has the final say on the new rules and is known for its conservatism.
The Australian Prudential Regulation Authority is considering the changes before releasing more details on its planned liquidity rules in the coming months.
However, any softening in the liquidity rules is likely to benefit the Australian banking sector, as the liquidity rules proposed until now have dampened profits.
The chief executive of the Australian Bankers' Association, Steven Munchenberg, said the changes announced on Monday could make it easier for banks to satisfy liquidity rules if they were adopted by APRA.
"On the face of it, it seems to be a positive thing," he said. "Not least because we know Australia, ironically because of its relatively strong fiscal position, was always going to have a problem meeting liquidity requirements."
Under the liquidity rules, banks must hold enough easy-to-sell assets to cover their lending outflows for a month - what APRA calls a "significantly severe liquidity stress scenario".
Australian banks would have been unable to meet this target due to the relatively low supply of government bonds, so the Reserve Bank has said it will offer banks a facility giving them access to high-quality assets.
If APRA relaxes its rules in line with the softer approach now planned by overseas regulators, banks may have less need for the Reserve's facility, as holding assets such as shares and corporate bonds could prove more attractive.
APRA this month implemented global capital rules earlier than overseas regulators.
However, Mr Munchenberg warned against rushing to implement the liquidity regime before the rest of the world.
"There's a danger of us getting out of sync here with the rest of the world," he said. "While we absolutely want well-capitalised banks with strong liquidity, there is a balance to be struck as well."
Frequently Asked Questions about this Article…
Global regulators agreed to soften proposed liquidity rules by allowing banks to hold a wider range of assets that produce higher returns, including shares and corporate bonds, and to phase the reforms in more slowly over a four-year period to 2019.
Weaker liquidity rules could let Australian banks put more of their excess cash into higher‑return assets such as corporate bonds and shares, which would likely support profit margins compared with holding only low‑yield government bonds.
The Australian Prudential Regulation Authority (APRA) has the final say on how global liquidity rule changes are adopted locally; it is considering the reforms and will release more details on planned liquidity rules in the coming months.
Australian banks would have struggled because the supply of top‑rated government bonds in Australia is relatively low, making it hard to hold the easy‑to‑sell assets required to cover lending outflows under the proposed liquidity stress scenario.
The Reserve Bank proposed a facility to give banks access to high‑quality assets because, due to the low supply of government bonds, Australian banks might otherwise be unable to meet the one‑month liquidity coverage target under the proposed rules.
Yes — if APRA relaxes its rules in line with the softer international approach, banks could hold assets like shares and corporate bonds, which may reduce their reliance on the Reserve Bank's high‑quality asset facility.
Steven Munchenberg, chief executive of the Australian Bankers' Association, said the international changes could make it easier for banks to satisfy liquidity rules and seemed broadly positive, while also warning against rushing to implement rules before the rest of the world.
Yes — industry leaders caution there's a danger Australia could get out of sync with global regulators; while strong liquidity and capital are important, a balance is needed to avoid unintended consequences for lending and stability.
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