Australia: APRA's final Basel III liquidity rules now in force

Last Updated: 11 February 2014
Article by Louise McCoach

Most Read Contributor in Australia, November 2017

Key Points:

The updated Prudential Standard APS 210 Liquidity (APS 210) implements key parts of the Basel III liquidity reforms.

On 20 December 2013, the Australian Prudential Authority (APRA) released its final rules on key elements of the Basel III liquidity reforms for authorised deposit-taking institutions (ADIs) in Australia.

These came into effect on 1 January 2014 in the form of updated Prudential Standard APS 210 Liquidity (APS 210) and Prudential Practice Guide APG 210 Liquidity (APG 210). Accompanying the final liquidity rules was a paper providing a response to submissions on earlier drafts of APS 210 and APG 210 released by APRA on 6 May 2013.

The final APS 210 and APG 210 largely reflect the May drafts, although amendments have been made to clarify and refine discrete aspects of the liquidity rules.

In this article, we'll survey the main changes to the finalised liquidity rules, and the key issues arising from them.

Final NSFR rules deferred

The Basel III liquidity reforms impose two quantitative measures on banks: a 30-day Liquidity Coverage Ratio (LCR) to address an acute stress scenario and a Net Stable Funding Ratio (NSFR) to encourage longer-term funding resilience.

The NSFR rules are subject to further review by the Basel Committee (see a summary of the proposed revisions here) and have therefore been removed from the final APS 210 pending further review and consultation. Nevertheless, APRA has reaffirmed that, once finalised, the NSFR will come into effect on 1 January 2018 in accordance with the Basel Committee's current timetable.

LCR vs minimum liquidity holding regime

The final APS 210 will apply to all ADIs. However, consistent with its earlier proposals, APRA will only apply the LCR requirements to the larger and more complex ADIs. This will include most locally incorporated banks as well as a number of foreign bank branches. ADIs with simple retail-based business models will continue to be subject to a simple liquidity ratio requirement under the existing minimum liquidity holdings regime.

Accelerated LCR timetable confirmed

APRA confirmed the timetable which it laid out in May 2013 for the implementation of the LCR. Under the final liquidity rules, the LCR will come into effect in Australia in full as of 1 January 2015 notwithstanding the fact that the Basel Committee permits the LCR to be phased in over a four-year period starting from 1 January 2015.

APRA is of the view that the implementation timetable is fully consistent with the capability and needs of the Australian banking system. By comparison, other jurisdictions have indicated that they may adopt some type of phase-in of the LCR. For example, the US Federal Reserve has previously proposed a two- year phase-in period for the LCR.

High quality liquid assets (HQLA) confirmed

In its May 2013 discussion paper, APRA proposed not to exercise its discretion to include a wider range of liquid assets in the definition of high quality liquid assets (HQLA). In its December 2013 paper, APRA reaffirmed that it will not broaden the definition of HQLA for domestic market purposes, even though the Basel III liquidity rules permit a broader range of liquid assets. HQLA recognised by APRA have therefore been confined to cash, balances held with the RBA and Commonwealth Government and semi-government securities (the so-called HQLA1 assets).

APRA does not believe that any other Australian dollar assets should be counted towards HQLA on the basis they do not meet the Basel Committee's qualitative requirements for such assets to be traded in large, deep and active markets, liquid during a time of stress and, in most cases, eligible for central bank operations. However, APRA stated that it will continue to review market developments in Australian dollar debt securities, and it is possible that the list of eligible HQLA may expand in the future.

Committed liquidity facility clarified

As part of the implementation of the LCR in Australia, APRA has confirmed that ADIs will have access to a secured committed liquidity facility (CLF) with the Reserve Bank of Australia (RBA). This will allow ADIs to meet shortfalls between their holding of HQLA and their LCR requirements by posting collateral with the RBA which is repo-eligible under the RBA's normal market operations (CLF eligible assets).

The final liquidity rules clarify a number of points in relation to the CLF, including the application process. ADIs are required to make an annual application to APRA outlining their Australian dollar liquidity needs in the context of the LCR and the resulting forecast of their required CLF size. APRA will conduct an "all reasonable steps" assessment of each ADI that requests a CLF for inclusion in the LCR. This is to ensure that the relevant ADI has first sought to manage its liquidity through balance sheet management before it turns to the CLF. To assist APRA with this assessment, the RBA has undertaken to supply, on an annual basis, an estimate of the aggregate amount of Australian dollar HQLA that could reasonably be held by ADIs.

APRA will set the size of the CLF for a particular ADI in proportion to that ADI's target net cash outflows. Such assessment will only be made against the Australian dollar LCR as the CLF is only to be used to manage any shortfalls in net cash outflows in Australia. As such, ADIs will need to have HQLA in other currencies to assist them in meeting their liquidity requirements in those currencies.

Having an HQLA liquidity buffer significantly above the LCR requirements will not prevent an ADI from gaining access to the CLF in the future; APRA will allow it to reduce the size of its buffer to a level in line with its peers, replacing HQLA assets with CLF eligible securities.

As a result of a trial exercise it recently ran in 2013, APRA has advised in a separate letter to ADIs dated 30 January 2014 that the amount of Australian dollar HQLA that could reasonably be held by LCR ADIs was equivalent to around 30 percent of the outstanding stock of Commonwealth Government Securities and securities issued by State and Territory Governments. APRA also made certain observations arising from this trial exercise which will have implications for ADIs making CLF applications going forward, the major ones being:

Appropriate composition of CLF collateral

As part of the annual CLF assessment process, APRA will consider the current and projected future collateral mix of each ADI. APRA will use two principles to assess the suitability of an ADI's CLF collateral mix:

  • that is has an appropriate degree of diversification, and not be concentrated in debt securities of a particular type, issuer, credit quality or tenor; and

the need for liquid markets in debt securities needs to be balanced against the dangers of exacerbating interconnectedness. Importantly, APRA provided some guidance on whether ADI-issued debt securities will be eligible collateral for the CLF. In this regard, APRA stated "[i]t is in the interests of all market participants that the market for short-term ADI-issued paper remains deep, liquid and active. APRA will not expect ADls to hold term debt securities issued by other ADls, such as senior unsecured debt, covered bonds or asset-backed securities, but ADls may choose to do so". APRA has separately stated that it will give particular attention to the proportion of self-securitised assets that are counted towards CLF eligible assets.

Related-party transactions: locally incorporated ADIs

APRA noted that a number of locally incorporated ADIs relied on funding from related-parties in an attempt to reduce their net cash outflows (NCO) for the purposes of the CLF application. Although APRA acknowledged that these funding arrangements may be acceptable, it indicated concerns with related party funding in the following scenarios:

  • where an ADI assumes that in a stress situation the related-party would not choose to withdraw funds from the ADI even though it had the right to do so; and
  • where a related-party enters into contractual arrangements that significantly impedes its ability to withdraw funds form the ADI without any obvious compensating benefit to that entity.

In relation to the first point, APRA stated that it cannot accept assumptions relating to the potential behaviour of directors or trustees of related parties that are not consistent with their fiduciary or legal duties. In relation to the second point, APRA stated that it cannot accept directors or trustees of related-parties signing legal agreements that are not in the best interest of those entities, their customers or members.

Related-party transactions: foreign bank branches

APRA stated that foreign branches will be required to make the following assumptions when projecting their Australian dollar NCOs for the purposes of applying for a CLF:

  • projected cash outflows from transactions with, or commitments to, related-parties are zero, regardless of contractual tenor; and
  • projected cash inflows from transactions with, or commitments from, related-parties are no greater than 50 percent of projected cash outflows.

APRA stated that the intention of the above assumptions is to exclude NCO projections for CLF purposes which disappear on consolidation of the parent's balance sheet. However, such transactions are not to be excluded from a foreign branch's liquidity management (including for the purposes of determining its LCR compliance). Therefore, foreign branches will need to manage the liquidity implications of these related-party transactions through their own resources rather than rely on the CLF.

Assessing foreign exchange derivatives' projected impacts on cash outflows

By their nature, only one side of an FX transaction will be denominated in Australian dollars. For some ADIs, this will result in their Australian dollar NCO being greater than their NCO when calculated in all-currencies. APRA will permit ADIs affected in this way to request a "customised assumption" regarding projected FX derivative cashflows as part of their CLF application.


Some key personnel within ADIs have a linkage between their remuneration and their performance on metrics such as divisional profit or return on equity. APRA is concerned that, for someone whose role is prudent liquidity management, this linkage gives them the wrong incentive. It will raise this with those ADIs offering these arrangements.

APRA will run another trial exercise this year and will no doubt continue to refine its CLF framework.

LCR cashflow assumptions refined

The cashflow assumptions in the final liquidity rules have changed little since the May 2013 drafts, but there have been some refinements – the more substantive refinements are summarised here.

No changes to qualitative requirements

All ADIs will be subject to the qualitative requirements of the Basel III liquidity framework. In this regard, APRA has not made any material amendments to the qualitative requirements since the May draft of APS 210.

Reporting requirements

APRA previously proposed a series of new reporting forms to allow for the collection of LCR and NSFR data, as well as standardised reporting of balance sheet maturity and forecasts. APRA has made some minor changes to the reporting framework as a result of revisions made by the Basel Committee and submissions received. In addition, the NSFR reporting form has been removed until the Basel Committee completes its review on the NSFR.

APRA is currently implementing the reporting forms using the Direct to APRA (D2A) portal. APRA expects releasing the final reporting forms in the near future when the D2A implementation has been completed.

What's next

It's important to remember that APRA will soon start consultations on proposed reforms to the prudential framework for securitisation, which will include the appropriate treatment of securitisations for liquidity purposes, so it's conceivable that APS 210 will need further amendments.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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