The Australian Prudential Regulation Authority (APRA) defined a new liquidity framework under which the country’s larger banks can turn to the Reserve Bank of Australia (RBA) for emergency liquidity support, the report in Australian Banking and Finance said.
The Basel Committee on Banking Supervision (BCBS) in December 2010 launched a global liquidity standard which it called the liquidity coverage ratio (LCR). A separate report in The Australian said the standard required banks to have enough high quality liquidity assets that can survive at least 30 days of severe liquidity stress.
This is to prevent larger banks from coming to RBA for emergency liquidity support every single time they encounter problems with their liquidity coverage, the report added. Now, the Australian prudential supervisor placed a standard that will determine a cap on how much a bank can get from the RBA in terms of emergency liquidity.
The standard will supposedly also protect the central bank from institutions that can abuse the emergency liquidity fund. However, the Australian Banking and Finance report stated that banks, as long as they meet the right criteria, can turn to RBA if needed.
Criteria for Emergency Liquidity Support
There’s a shortage of high quality liquidity assets in Australia right now, the report said, which means banks are more likely to turn to the central bank for support. The criteria imposed by the BCBS is fair enough for the banks and for RBA, The Australian report added.
Under the standard, before the banks can get the support they need from the central bank, they must first prove that they have taken reasonable measures such as lengthening the duration of its liabilities and funding itself from stable sources, the report explained. It added that banks must show it managed itself efficiently and used its funds as conservatively as possible.
In 2011, APRA said it will review each bank’s liquidity risk management framework in order to determine the proper cap size for it. It then decided, according to the report, that the cap will depend on the banks’ Australian dollar net cash outflow target. There will be an allowance for a well-sized buffer though.
The report was quick to point out though that such a scheme does not apply to smaller authorized deposit-taking institutions such as credit unions and building societies. These institutions, the report noted, are covered by the minimum liquidity holdings regime.
Before banks can get the liquidity support it needs, they have to present a statement of the board’s tolerance for liquidity risk, a liquidity transfer pricing mechanism and suitable remuneration arrangements for those who will fund the liquidity, the report enumerated.