Impact of draft Liquidity prudential standard for banks operating in Australia
Wednesday, 16 November 2011— Ernst & Young has examined the likely impacts of APRA’s draft updated APS 210 Liquidity prudential standard.
As anticipated, in today’s release APRA has not widely departed from the Basel Committee on Banking Supervision release in December 2010 – Basel III: International framework for liquidity risk measurement, standards and monitoring III release.
Key implications for the Australian banking industry from the proposed draft standard include:
- Confirmed higher liquidity requirements and cost imposition for banks. APRA’s announcement provides certainty in relation to the proposed rules. Australian banks have already begun assessing business impact and developing plans in response to likely liquidity rule changes. Today’s release of the draft prudential standards allows for operational execution, however APRA’s detailed reporting requirements are yet to be released (expected in 2012).
- Assessing treasury, finance and risk target operating models. The proposed standards will involve more comprehensive and time-sensitive reporting requirements than currently required. As a result, ADIs will need to review their treasury, finance and risk target operating models and enhance systems and data capabilities in order to meet the new requirements.
- APRA is sticking to the Basel III timetable for all quantitative requirements commencing 2015. APRA has also confirmed that they will implement the qualitative requirements for Basel sound principles for liquidity management for all banks during 2012.
- RBA announcement Committed Liquidity Facility. Given the limited amount of government debt in Australia to meet the high quality liquid asset requirements, the RBA, in conjunction with APRA, have released their Committed Liquidity Facility requirements and associated fees.
Ernst & Young’s Oceania Financial Services Managing Partner, Andrew Price says:
“The draft liquidity prudential standard will have a greater impact on Australian banks than the other Basel III initiatives. The significance of the impact will greatly depend on a banks operating model and primary customer channel – internet or branch – and their deposit profile,” Mr Price said.
“With bank borrowing costs rising in response to the troubles in the Eurozone and an expectation of further net interest margin narrowing, the proposed liquidity rules are expected to place additional pressure on bank net interest margins and hence interest rates.
“The new liquidity rules illustrate the importance of retail savings as a source of stable liquidity generation, over wholesale funding. We expect to see further product initiatives to attract superannuation fixed income investments into APRA-defined stable retail deposits.
“The new liquidity rules will also continue to drive change in the relative pricing of banking products and the rationalisation of product features, as banks move to reward products that generate liquidity benefits (such as long term retail liabilities) versus products that consume liquidity (such as long dated corporate lending).
“Banks that are able to reasonably manage the deployment of funding and the measurement of liquidity benefits and related costs will gain a competitive advantage, by being quicker to market with innovative products.”
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