Plan to tighten liquidity rules irks banks
By Eric Johnston | smh.com.au | 26 October
Only months after the worst global financial crisis since the Great Depression, banks are arguing the banking regulator is taking too hard a line on proposed measures to improve confidence in the system.
Some of Australia's largest banks have mounted a behind-the-scenes lobbying campaign, arguing against a proposal that all banks have available cash on hand to fund 30 days of operations – raised from the current level of five days.
Banks argue any such move by the Australian Prudential Regulation Authority would be likely to force bigger banks to set aside billions of dollars in largely unproductive assets such as cash and government bonds that cannot be lent out, hurting their profitability.
One bank executive said the tough approach to liquidity was largely unnecessary given the relative health of the banking sector, even through the financial crisis.
Australian banks were well capitalised, he said, and had taken steps to pump up liquidity as the crisis started deepening.
A second banker – neither wanted to be identified, given the confidential nature of talks – said that by forcing banks to hold too much liquidity impeded their ability to write new loans.
APRA is taking submissions on the proposed rules until the end of next month and plans to publish its draft ruling early next year. It has said it wants the standards finalised by the end of next year.
But one banker said the biggest concern was APRA's proposed change on how much cash or cash-like assets banks must have.
Elsewhere, banks have protested over an APRA plan to restrict the assets that are tied up in interbank lending markets from being considered "liquid".
Under the proposals, liquid assets are required to be unencumbered – that is there should be no constraints over their future availability.
For APRA's part the rules are aimed at protecting depositors from further shocks to the global economy.
"The crisis has highlighted the need for [authorised deposit taking institutions] to have adequate levels of liquidity and robust liquidity risk management systems," APRA said in its consultation paper.
Such institutions cover banks, building societies and credit unions. The role of banks is to transform short-term deposits into long-term loans, although this makes them vulnerable to liquidity risks.
So-called liquidity buffers, which are made up of cash or government bonds, help ease liquidity strains.
However, some global banks were caught out in September last year when funding markets dried-up as fears spread through the financial system about contagion from the US subprime crisis.
Market analysts say forcing banks into holding higher levels of liquidity also risks pushing up the cost of credit.
"These things are going to make capital more expensive for the banks and it increases the cost of lending for the banks," said Philip Bayley, a principal with ADCM Services.
First published by Smh.com.au on October 26 2009
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