APRA just confirmed Australia has a massive $245 billion emergency liquidity line to banks

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Australia’s prudential and banking regulator, APRA, today put a number on the absolute size of the liquidity facility that Australian tax payers, via the RBA, have granted the banking industry.

In a letter to Australia’s banking industry posted on the APRA website Charles Littrell, executive general manager in APRA’s supervisory support division, said that the total size of the RBA’s emergency liquidity line, the committed liquidity facitlity (CLF), that APRA had granted to banks was $245 billion.

The CLF is needed because under new global liquidity guidelines instituted in the aftermath of the collapse of Lehman Brothers and Northern Rock, and the near-collapse of many more during the GFC, the banking boffins in Basel have required all banks to hold more liquidity on balance sheet.

The problem in Australia however is that a large number of foreigners own large swathes of Australia’s federal and state government bond market. That makes it difficult for the banking industry to get access to enough bonds to provide their own sources of liquidity, by selling the bonds, in times of liquidity stress.

As a consequence Littrell said, “The CLF will be sufficient in size to cover any shortfall between the ADI’s holdings of HQLA and the requirement to hold such assets under the LCR”, or liquidity coverage ratio.

That’s not to say that banks necessarily get a free kick by relying on the RBA for the provision of emergency liquidity, Littrell said because “[banks] will be required to demonstrate that they have taken ‘all reasonable steps’ towards meeting their LCR requirements through their own balance sheet management, before relying on the CLF.”

Which means the CLF really is only for use in a real bank or system-wide financial emergency. That’s important because it means in the rare, unlikely, but still plausible disaster scenario, where an Australian bank needs to rely on the RBA for liquidity it will be Australian taxpayers, via the RBA, who are bailing out the bank, or the system, out.

Equally important is that this facility is only only part of new APRA and global liquidity standards. Just last month APRA Chairman Wayne Byers said Australian banks still face long-term liquidity issues.

Byers said the introduction of the net stable funding ratio (NSFR) which will be introduced in 2018 will complement the LCR which stands ahead of the CLF.

He added however:

The only observation that I want to make is that given their funding structures, the largest Australian banks do not easily meet the new standard and, as things stand today, international comparisons are not favourable to them. Some further lengthening of Australian bank maturity profiles is therefore likely to be needed over time to truly strengthen their funding resilience

Part of this concern is that Byers said Australian banks are still too reliant on offshore funding. Clearly, Australia’s massive emergency liquidity line to the banks looks like just one step in an enduring requirement for the banking industry to improve its liquidity.

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