The Australian Prudential Regulation Authority has again reminded the market that it plans to keep prudential standards high. It refused to include supra-national ("Kangaroo") bonds in the list it published yesterday of assets that satisfy new Basel III liquidity rules.Basel III's liquidity coverage ratio, to apply from 1 January 2015, aims to ensure banks can continue to provide funds during a market dislocation such as that of late 2008. To do so, it requires banks to hold sufficient high-quality liquid assets to cover expected net cash outflows for 30 days.Some market observers had reportedly speculated that APRA's definition of "high-quality liquid assets" could include supra-national bonds issued by groups such as the World Bank and the International Bank for Reconstruction and Development (IBRD).But APRA concluded that these and other instruments did not meet its requirements for liquid $A-denominated assets. It said yesterday that its review had "given particular attention to the liquidity of the instrument during the market disruptions of the global financial crisis." The only assets that would qualify as "level 1 assets" for liquidity coverage ratio purposes were cash, balances held with the RBA, and Commonwealth Government and semi-government securities, APRA said. And no assets at all would qualify as "level 2 assets", a broader category which can include some corporate bonds and covered bonds."It is confirmation of APRA's continued hard line on the implementation of Basel III rules," said Mike Codling, banking leader at PricewaterhouseCoopers.The decision appeared to surprise debt markets, and triggered a Kangaroo bond sell-off. Annette Beacher of TD Securities said yesterday that "most market participants expected supra-national paper… to be included in the level 1 list". (TD Securities was a manager of the IBRD's $A1.5 billion February 2010 Kangaroo bond issue.) Triple T Consulting principal Sean Keane said government and semi-government debt had been bid up against supra-national debt after the decision. The market now assumed much lower demand for supra-national issues in the future, he said.APRA's decision appears to be closely based on the Basel III liquidity risk framework, which was published last December by the Bank of International Settlements.The announcement did not surprise everyone; at least one banker briefed by APRA yesterday described it as "not that much different from what we were expecting".APRA also noted that with the Basel Committee still assessing assets' liquidity characteristics, and Australian markets evolving, the list of assets eligible for the liquidity coverage ratio could grow by 2015, meaning Kangaroo bonds and instruments like covered bonds could eventually be accepted.The liquidity coverage ratio has posed particular problems for Australia and other countries with relatively small stocks of government debt. These countries simply don't issue enough government debt to allow their banks to meet the ratio. On 17 December, the Basel Committee and Australian authorities announced a special mechanism to solve this problem, with Australia's top 40 authorised deposit-taking institutions able to set up a secured lending facility with the RBA.Yesterday's decision has refocused attention on the cost of this RBA facility. PwC's Codling said the use