Lenders get reprieve on liquidity rules
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 in a welcome development for overseas banks, on Monday global regulators said they would water down the liquidity rules so that 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 that the changes would crimp lending and strangle economic recoveries overseas.
It is not clear how the backdown 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 had the impact of dampening profits.
The chief executive of the Australian Bankers Association, Steven Munchenberg, said the changes announced on Monday could make it easier for local banks to satisfy liquidity rules if they were adopted by APRA.
"On the face of it, it seems to be a positive thing. Not least because we know Australia, ironically because of its relatively strong fiscal position, was always going to have a problem meeting liquidity requirements," he said.
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 said it would 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 prides itself on taking a conservative approach to bank regulation, and this month implemented global capital rules earlier than overseas regulators.
However, Mr Munchenberg warned against rushing to implement the liquidity regime ahead of the rest of the world.
"There's a danger of us getting out of sync here with the rest of the world. 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 liquidity rules require banks to hold enough easy-to-sell, high-quality assets to cover lending outflows for about a month in a severe stress scenario. They matter because they influence bank safety, lending capacity and profitability — tougher rules can reduce bank profit margins, while softer rules can allow banks to earn higher returns by holding a wider range of assets.
Global regulators recently softened proposed liquidity rules so banks can hold more assets that pay higher returns (for example, shares and corporate bonds). If APRA follows this softer approach, Australian banks could potentially boost profit margins by investing more free cash in higher‑return assets instead of only top-rated government bonds.
APRA has the final say on how global liquidity rules are applied in Australia. While global regulators set international guidance, APRA reviews those changes locally and decides whether to adopt softer or stricter rules — and it’s known for taking a conservative approach to bank regulation.
Australian banks could have struggled because there’s a relatively low supply of government bonds in Australia. The original rules emphasized holding top-rated government bonds as high-quality liquid assets, making it harder for local banks to meet the target without alternative support.
The Reserve Bank said it would offer banks a facility giving them access to high‑quality assets to help meet liquidity targets. If APRA relaxes rules in line with the global softening, banks may have less need to use the Reserve Bank’s facility because they could hold other attractive assets like shares and corporate bonds.
The article notes regulators phased the reforms in more slowly after concerns they could crimp lending and strangle recoveries overseas. A softer liquidity regime could make it easier for banks to satisfy requirements without holding only low‑yield government bonds, which may reduce pressure on profit margins and could influence lending decisions — but APRA will balance stability and economic effects when deciding.
Steven Munchenberg, chief executive of the Australian Bankers Association, said the changes appear positive and could make it easier for local banks to meet liquidity rules if APRA adopts them. He also warned against moving out of step with the rest of the world, stressing a balance between strong liquidity and international alignment.
Global regulators indicated the reforms would be phased in more slowly over four years to 2019. For everyday investors, that means any material effects on bank balance sheets, lending practices or profit margins are likely to unfold gradually as regulators and APRA consider and implement changes.
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