The Australian Prudential Regulation Authority (APRA) has released further guidance on how it will treat authorised deposit-taking institutions' (ADIs) applications to establish a secured committed liquidity facility (CLF) as part of its implementation of the Basel III liquidity framework in Australia.

APRA clearly acknowledges the role of a CLF to the extent that ADIs do not hold enough Australian dollar high-quality liquid assets (HQLA) to satisfy the liquidity coverage ratio (LCR) regime, but it has made it clear that ADIs requiring a CLF ("scenario analysis ADIs") are still expected to improve their liquidity risk profiles both before and after the LCR regime commences:

"ADIs have made steady and material improvements to [ADIs'] liquidity risk profiles, but more remains to be done in both the quantitative and qualitative dimensions of liquidity risk management."

If it fails to reduce its liquidity risk to APRA's satisfaction, an ADI might find the amount of the CLF it can include in its LCR is progressively reduced.

How will APRA deal with an application for a CLF?

The CLF itself will be offered by the Reserve Bank of Australia (RBA); APRA will determine its size for each scenario analysis ADI and review it annually.

As a general starting point, APRA will review any request in the context of its requirement that the ADI has first taken "all reasonable steps" to meet its LCR requirements through its own balance sheet management and has otherwise complied with key qualitative and quantitative liquidity requirements.

Its annual process for determining the CLF will be as follows:

Step 1: The RBA will estimate the available Australian dollar HQLA that could reasonably be held by scenario analysis ADIs over the CLF approval period. It will start by assuming that the level of Australian dollar HQLA currently held in aggregate by scenario analysis ADIs is appropriate, and then look at factors such as the total amount of Australian dollar HQLA securities on issue, the market participants that are holding that stock and the need for the continued smooth functioning of markets.

Step 2: Each scenario analysis ADI will submit a three-year funding plan which sets out, among other matters, a forecast for Australian dollar net cash outflows over the CLF approval period. APRA will assess this and also consider the ADI's planned program of actions to minimise reliance on the CLF. APRA will then agree with each ADI a target Australian dollar net cash outflow that will then be used to determine the CLF size.

Step 3: The size of the CLF for each ADI will be calculated as a percentage of the system-wide CLF size (at 100 percent LCR coverage) based on each ADI’s target Australian dollar net cash outflows.

Step 4: Although the CLF limit will be set in the context of an LCR requirement of 100 percent, APRA expects ADIs to have an LCR at all times greater than 100 percent. Where APRA has approved the use of a CLF for LCR purposes, the size of the CLF will be increased to allow for an appropriate liquidity buffer as agreed by APRA.

What's next for implementing the LCR regime in Australia?

APRA is conducting a trial exercise with all scenario analysis ADIs this year; once this is completed, more details of the CLF process will be released. This is expected to set out, among other things, its views on the make-up of the CLF portfolio of eligible securities.

At some time in the first part of 2014, APRA will release its expectations on the use of third-party securities and self-securitisation as security for the CLF.

APRA is still intending that the LCR regime commence on 1 January 2015.

Key actions for ADIs

APRA has made it very clear that a CLF doesn't mean that scenario analysis ADIs can relax their efforts to reduce their liquidity risk, either before or after 1 January 2015. It has identified the following as areas ADIs should concentrate on in the coming months:

  • increasing the proportion of assets funded by retail deposits;
  • increasing the average tenor of wholesale liabilities; and
  • refining terms and conditions for some products.

Failure to do so could make acquiring or retaining a CLF more difficult