Australia's Financial Regulator Has Issued A Major Warning To Foreign Banks

Getty/Jamie McDonald

Yesterday, Australia’s bank regulator a href=””>released the details of the test it has performed on the operation of the Reserve Bank’s Committed Liquidity Facility (CLF).

At first blush the topic may sound a bit academic but it goes to the heart of financial stability in Australia and for Australia’s banking Sector because the CLF and APRA’s approval at a system-wide and individual bank level deals with the provision of emergency cash to the Australian financial system in times of trouble.

The CLF is designed to fill the void in liquid assets between what Australia’s banks can hold, or have access to, in local Commonwealth and Government debt as High Quality Liquid Assets (HQLA) for the provision of their own emergency liquidity needs, and what they need as a backstop from the RBA as lender of last resort in the event of a crisis.

The CLF will give banks the ability to turn assets, at this point mostly mortgaged backed securities they will hold on balance sheet, into cash by selling them (via a repurchase agreement) to the RBA so that they can raise cash in the event of a run on their bank or the system as a whole.

The result of course is that as we saw in other countries during the GFC the Government, via the central Bank, essentially backstops banks in trouble and in dire straits – as happened in Ireland – the entire banking system.

So it makes sense that APRA, the RBA and the Government want to limit the risk of the assets they are holding in the time of emergency. To this end the RBA has changed the rules for the CLF to give more transparency on the assets it takes.

Equally though also in conducting the test APRA noted that there is no way that they are going to leave the Australian banking system hostage to a liquidity event or run on a parent bank or subsidiary in another market.

In fairly direct language for a regulator APRA noted it had difficultly “assessing applications from foreign bank branches that had a high proportion of projected cash inflows or projected cash outflows arising from transactions with related-party entities.”

They added that “the liquidity implications of these related-party transactions need to be managed by the branch through its own resources, rather than through reliance on the CLF.”

That’s regulator code for “don’t expect us to backstop your offshore operations”.

It’s clear why APRA, on behalf of the Australian taxpayer, thumbed its nose at foreign operations because the CLF test shows that in times of trouble the RBA is likely to need to put as much of $282 billion of taxpayers’ money into the market to shore up the system.

That’s not much less than the total current debt of the Australian Government.

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