Bank bills, certificates of deposit and debt securities issued by other ADIs will no longer be counted as eligible liquid assets for a large number of banks, under proposed changes to the Australian Prudential Regulation Authority’s liquidity rules. The changes will have earnings and capital impacts for smaller ADIs. APRA yesterday sent a letter to authorised deposit-taking institutions detailing proposed changes to liquidity and capital requirements in the wake of bank failures in the United States and Europe earlier this year. Most of the changes would be to liquidity arrangements and would have the biggest impact on ADIs that are subject to minimum liquidity holding rules, rather than banks using the liquidity coverage ratio regime. Mutual banks, credit unions and some small banks operate under the MLH regime, while the big banks, regionals and foreign banks operate under LCR rules. In its letter, APRA said: “Australian banks’ liquidity position remains strong, and APRA is not proposing to increase the amount of liquidity that banks must hold.  “APRA’s review found that most banks have prudent practices for managing risks. However, there are some gaps that need to be addressed.” Under the current rules the value of liquid assets can be included in banks’ accounts at amortised cost rather than market value. APRA said unrealised losses can result in a weaker liquidity position than assumed. The revisions would ensure that ADIs on MLH value liquid assets at their market value. Unrealised losses would be deducted from capital for all ADIs. “Unrealised losses on liquid assets were a key source of stress for some US banks earlier this year, resulting in less liquidity being available at a time when it was needed most,” APRA said. The revisions would also require all ADIs to have robust processes for accessing exceptional liquidity assistance from the Reserve Bank when needed. APRA will provide greater clarity on the information it would request from an ADI in such an event. “It is important that systems are in place in advance, so that ADIs are operationally ready to provide certain key information at the time of their request,” APRA said. On the proposed change to the composition of liquid assets, APRA said the exclusion of bank bills, certificates of deposit and debt securities issued by other ADIs would align the approach taken by ADI’s operating under MLH with those operating under LCR. APRA said holdings of other bank securities represent around 60 per cent of existing liquid assets of ADIs operating under MLH. If they replace those securities with lower yielding government bonds their earnings would be impacted. The regulator is proposing to allow ADIs to run down their bank securities over five years.  It has called for feedback on the proposals.