RBA defends crisis kitty
RBA assistant governor Guy Debelle said the committed liquidity facility (CLF), operating from January 2015 after the Basel 3 rules kick in in Australia, would not help banks avoid the stringent new liquidity standards or blow out the central bank's balance sheet.
Basel 3 requirements, set up after the financial crisis, require banks to hold enough high-quality liquid assets - such as government bonds and semi-government securities - to withstand 30 days of stress.
The low level of Australian government debt has meant banks only own about $130 billion of these securities - about $300 billion short of what they would need to meet the Basel standards, Mr Debelle said at a speech to the Australian Financial Markets Association in Sydney on Friday.
The new facility would help banks meet the liquid assets requirements by allowing them to use as collateral other assets beyond government bonds when borrowing from the Reserve Bank. A fee of 15 basis points would be charged.
"The design of the CLF ... should not result in any material change in the size of the bank's balance sheet and has been structured to avoid a significant increase in the balance sheet that would have risked the effective functioning of domestic markets," Mr Debelle said.
He said 15 basis points fee was an "appropriate price for a liquidity option [banks] have always implicitly held".
Critics had said that the facility made liquid assets too easily available to the banks.
Frequently Asked Questions about this Article…
The CLF is a $300 billion liquidity arrangement set up by the Reserve Bank of Australia to help banks meet new international liquidity rules. It gives banks a committed option to borrow from the central bank using a wider range of collateral than just government bonds, so they can meet Basel III liquidity standards.
The RBA introduced the CLF because Australia has a relatively low level of government debt, which means banks hold fewer high-quality liquid assets (like government and semi-government bonds) than Basel III requires. The facility bridges that gap so banks can demonstrate they have enough liquid assets to withstand stress.
The CLF is intended to operate from January 2015, when the Basel III liquidity rules come into force in Australia. It is designed specifically to help banks meet the new 30‑day liquidity coverage requirements set out under Basel III.
Basel III requires banks to hold enough high‑quality liquid assets to survive 30 days of financial stress. For everyday investors, this means banks are expected to be more resilient in a crisis because they must hold safer, more liquid assets such as government and semi‑government securities.
According to the RBA, Australian banks currently own about $130 billion of government and semi‑government securities, which leaves them roughly $300 billion short of the amount they would need to meet the Basel III liquidity standards without a facility like the CLF.
The CLF allows banks to use other assets beyond government bonds as collateral when borrowing from the Reserve Bank, effectively recognising a broader pool of eligible collateral. Banks that use the facility pay a fee of 15 basis points (0.15%) for the liquidity option.
The RBA has said the CLF is structured so it should not cause any material increase in the central bank's balance sheet or enable banks to avoid the Basel III standards. The design aims to provide a liquidity option without significantly expanding central bank operations or weakening the rules.
Critics argue the CLF could make liquid assets too easily available to banks. The RBA, through assistant governor Guy Debelle, responded by defending the facility's design and pricing, saying the 15 basis point fee is an appropriate price for a liquidity option banks have implicitly held and that the facility will not undermine the new liquidity standards.
Call 1300 880 160
Start a chat
Schedule a call
