Yesterday the Australian Prudential Regulatory Authority
(APRA) issued a media release which seeks to
clarify the types of high-quality liquid assets that Australian
ADIs will be able to count towards their Liquidity Coverage Ratio
(LCR) under APRA's implementation of Basel
III's new global liquidity standards.
When the LCR comes into effect for Australian ADIs on 1 January
2015, APRA will only allow Australian ADIs to count towards their
LCR assets comprising cash, balances held with the Reserve Bank of
Australia (RBA) and Commonwealth Government and
What did the Basel Committee say about liquidity?
In its December 2010 paper, the Basel Committee released new
global liquidity standards which were designed to ensure that banks
will have adequate liquidity buffers to survive liquidity shocks.
One of the cornerstones of the new standards was the
introduction of the LCR to test whether a bank has sufficient
high-quality liquid assets to survive a significant stress scenario
lasting for 30 days. In its December 2010 paper, the Basel
Committee indicated that high-quality liquid assets could
cash, central bank reserves and certain categories of
government debt (Level 1 assets); and
a lesser quantity of other types of government debt, highly
rated corporate bonds (non-bank issuers) and covered bonds,
provided that these instruments were traded in large, deep and
active markets and could demonstrate a proven track record as
reliable sources of liquidity (Level 2
What does the announcement mean for Australian ADIs?
Yesterday's announcement by APRA effectively confines the
assets that an Australian ADI can count towards their LCR to Level
1 assets and confirms that no assets can be counted towards Level 2
What does the announcement mean for Kangaroo and covered
Highly rated corporate bonds and covered bonds are conspicuously
absent from APRA's list of LCR-eligible assets, which suggests
that APRA does not believe these instruments to be reliable enough
sources of liquidity to be counted towards an Australian ADI's
Although this appears to be a set back for Australia's
Kangaroo and fledgling covered bond markets, there is always the
possibility that APRA will expand the list of Level 1 or Level 2
Assets before the LCR comes into effect on 1 January 2015. APRA has
already indicated that it will consider expanding the list of
LCR-eligible assets pending the outcome of testing by the Basel
Committee on the liquidity characteristics of Level 2 assets and
APRA's assessment of market developments over the period
leading up to 1 January 2015.
It is also possible that Kangaroos and covered bonds may
indirectly assist the larger Australian ADIs (which APRA has
indicated is initially the "top 40") to satisfy the new
liquidity requirements. This is because under the RBA's committed secured liquidity facility,
larger Australian ADIs may use certain RBA repo-eligible assets
(which currently include certain categories of Kangaroo bonds and
highly rated debt issued by ADIs) as collateral under the RBA
facility to meet any shortfall in their LCR requirements.
Having said this, the joint APRA/RBA announcement in December
2010 made it clear that the RBA facility was only able to be
accessed as a last resort after an Australian ADI has demonstrated
that it has taken "all reasonable steps towards meeting their
LCR requirements through their own balance sheet management".
Therefore, although Australian ADIs may indirectly utilise certain
Kangaroo and covered bonds to meet their LCR requirements by
posting these under the RBA facility, the RBA facility may only be
available to Australian ADIs who have first demonstrated genuine
efforts to source sufficient Commonwealth Government
APRA has indicated that the implementation of the global
liquidity framework in Australia (including the LCR requirements),
will be subject to consultation during 2011 and 2012. Given the
high ratings of covered bonds and many of the Kangaroo issuers into
the Australian market, it is hoped that the Australian Kangaroo and
covered bond market will develop sufficient levels of depth and
liquidity during the consultation period to persuade APRA to
reconsider their inclusion as Level 2 assets for the purposes of
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