A BACK down by global regulators could support Australian bank profit margins by allowing lenders to put more of their free cash into assets that generate higher returns.
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."