New rules requiring Australian banks to hold larger reserves of liquid assets are likely to have a "substantial" impact on Australian banks, concludes a new paper from the Australian Centre for Financial Studies.The new rules are required to enforce the liquidity coverage ratio (LCR) required under the Basel III agreement. The LCR aims to ensure banks can continue to provide funds during a market dislocation such as that of late 2008. But the paper, by ACFS research director Professor Kevin Davis, argues the new rules will create previously unexplored problems for the Reserve Bank of Australia. As a result, "the whole structure of arrangements for system liquidity management may need to be re-examined", the paper concludes.Among the concerns raised in the paper:-- A new RBA lending facility set up to allow Australian banks to meet the LCR faces difficulties because it is theoretically impossible to set a "right" price for the facility.-- In a liquidity crisis, many banks raise cash by selling government securities. But that may push down their price (and raise their yields) to the point where the RBA feels compelled to support their price through government debt purchases. This runs contrary to the stated aim of the LCR, which is supposedly designed to allow the system to continue working without central bank intervention.-- The same problem would arise in a crisis when banks used the secured lending facility that the RBA is setting up as a means of providing liquid assets for Australian banks to meet LCR requirements.-- In some circumstances banks may find it more attractive to build up their exchange settlement account balances with the RBA, rather than use the new RBA liquidity facility.One response to these issues being canvassed by regulators - and reported today by the Australian Financial Review - is for a cap on the proportion of government bonds that banks may hold.There is no mention in the article of what the cap might be, but the ACFS report notes that "banks could swallow up virtually the entire public debt market to meet the new liquidity requirements."