Banks angry at 'rush' to regulate
To protect the world economy from financial shocks, authorities are finalising rules forcing banks to hold larger amounts of easy-to-sell assets such as government bonds.
The local regulator plans to start the reforms from 2015, in contrast to some other countries, which have delayed the start date until 2019. This conservative stance has sparked complaints from the banking lobby group that Australia was rushing ahead of the pack.
But Australian Prudential Regulation Authority chairman John Laker dismissed claims it was ahead of the world.
Several overseas competitors of the big four banks had already met the liquidity standards, he said.
"We're not in the front of the pack," Dr Laker told a Senate estimates hearing.
"My view has been that we should be in the leading part of the convoy because the arrangements in Australia will allow our banks to meet that target by turning up a facility [operated by] the Reserve Bank."
Under the coming 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".
Dr Laker said the regulator was avoiding the opportunity to delay the reforms because the financial system was not under the same pressures as overseas. He also said the target would help curb risks from banks' reliance on volatile wholesale debt markets.
"The International Monetary Fund continually draws attention to the vulnerability of the Australian banking system to dislocation in offshore funding markets because our banks continue to rely on those markets," Dr Laker said. "We think it's incumbent on our banking system to demonstrate ... they are able to meet liquidity pressures."
To tackle a shortage of government bonds, the Reserve Bank will offer banks a "committed liquidity facility" giving them access to funds at 0.25 percentage points more than the cash rate.
It has been argued the facility is too generous to the banks, but Dr Laker said APRA would encourage banks to take "all reasonable efforts" to use their own balance sheets before using the facility.
"No prudential regulator ... wants the central bank to become the lender of first resort," Dr Laker said.
Frequently Asked Questions about this Article…
APRA's liquidity rules require banks to hold larger amounts of easy‑to‑sell assets, such as government bonds, so they can cover lending outflows for a month under a “significantly severe liquidity stress scenario.” For everyday investors this reduces the risk of bank funding problems spilling into the economy and helps keep the banking system safer during financial shocks.
The local regulator planned to start the reforms from 2015, while some other countries delayed their start date until 2019. APRA chose not to delay the reforms because it judged the Australian system's circumstances differed from overseas.
APRA chairman John Laker rejected the suggestion Australia was racing ahead. He noted several overseas competitors of the big four banks had already met the liquidity standards, and said Australia aims to be in the leading part of the convoy—but not necessarily in front of the pack.
To tackle a shortage of government bonds, the Reserve Bank will offer a committed liquidity facility that gives banks access to funds at 0.25 percentage points more than the cash rate. It's designed as a backstop to ensure banks can meet liquidity targets if needed.
No. APRA said it will encourage banks to make “all reasonable efforts” to use their own balance sheets before tapping the facility. The regulator emphasised it does not want the central bank to become the lender of first resort.
APRA says the target will curb risks from banks' reliance on volatile wholesale debt markets. The International Monetary Fund has highlighted the vulnerability of Australian banks to dislocation in offshore funding markets, and the rules are intended to demonstrate banks can meet liquidity pressures.
John Laker is the chairman of the Australian Prudential Regulation Authority (APRA). At a Senate estimates hearing he dismissed claims Australia was ahead of the world, said some overseas banks already meet the standards, and explained the reforms will allow banks to meet targets—partly by using a Reserve Bank facility if necessary.
Easy‑to‑sell assets are highly liquid securities that banks can quickly convert to cash in times of stress. Government bonds are emphasised because they are widely accepted, liquid, and can be sold or used as collateral to meet a month of lending outflows under the new liquidity rules.
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