The Reserve Bank of Australia will provide a committed liquidity facility (CLF) to act as a backstop for banks in line with the Basel III framework relating to liquidity reforms. The CLF will commence from 1 January 2015.
There is a need for a facility of this sort because of the limited volume of high-quality liquid assets (i.e. government debt) in Australia. The facility is geared to making sure that participating authorised deposit-taking institutions (ADIs) have access to sufficient liquidity to respond to liquidity shortages.
The way the CLF will work is that participating ADIs will be able to access a pre-specified amount of liquidity from the RBA by entering into repurchase agreements of eligible securities outside the RBA’s normal market operations. To get the RBA’s commitment, ADIs will need to pay the RBA ongoing fees and must first have received approval from APRA to be able to tap the CLF. ADIs will be required to submit three-year funding plans to APRA as part of their scenario analyses including “a forecast for Australian dollar net cash outflows over the CLF approval period”.
Securities that can be used under the CLF will include all securities eligible for the RBA’s normal market operations. The RBA will purchase securities under repo at an interest rate set 25 basis points above the Board’s target for the cash rate, in line with the current arrangements for the overnight repo facility.
In part the CLF is designed to be unattractive to banks so that they find other ways of making sure that their liquidity levels are high enough. Some analysts see this as positive for the Australian bond market, particularly semi-government bonds.
APRA is instigating a trial exercise this year under which ADIs will be requested to submit applications for pro forma CLFs for 2014.