What Australia's liquidity reform update means for the banks

Some features are credit positive.

Moody's notes that last Thursday, the Australian Prudential Regulation Authority (APRA) released further details of how it will implement Basel III liquidity reforms, focusing on the operation of the Reserve Bank of Australia’s forthcoming committed liquidity facility. The update contains a number of features that are credit positive for Australian banks.

Here's more from Moody's:

The committed liquidity facility will launch on 1 January 2015 under one of the Basel III provisions specifically for countries with low government debt, and where consequently the stock of high-quality liquid assets is insufficient for banks to meet their liquidity coverage ratio (LCR) requirements.

In this latest update, APRA acknowledged that bank liquidity profiles have improved since 2008 but advised that “more needs to be done.”

APRA said that current holdings of Australian dollar-denominated, high-quality liquid assets for the system are appropriate, which we interpret as meaning further improvements are likely to come from banks reducing the net cash outflow component of their LCRs.

APRA specifically identified increasing retail deposits and the tenor of wholesale funding and refining terms and conditions for some liability products as ways to achieve this improvement.

APRA’s comments will encourage banks to further improve their funding profiles by compelling them to demonstrate that they have taken all reasonable steps to meet LCR requirements through their own balance sheet management before they access the committed liquidity facility.

Banks would need to apply annually to access the committed liquidity facility, and the amount they receive will depend on their three-year funding plan, which must include a forecast for Australian dollar net cash outflows for the year.

Once APRA sets the facility size, it is unlikely to allow a change absent a material change in the bank’s business, such as a substantial acquisition or divestiture. This is credit positive because it will limit banks’ ability to grow loans aggressively at the expense of worsening their liquidity profiles.

APRA confirmed that banks can only use the committed liquidity facility to cover Australian dollar liquidity needs. The lack ofcoverage for foreign currency liquidity requirements is credit negative.

Australia’s four major banks, Australia and New Zealand Banking Group Ltd.,10Commonwealth Bank of Australia, National Australia Bank Limited and Westpac Banking Corporation, will be particularly affected by this rule because they are the main issuers of debt in foreign wholesale funding markets.

National Australia Bank has the highest proportion of foreign debt on issue, in line with its more geographically diversified presence, notably its ownership of the UK’s Clydesdale Bank plc.