Banking system liquidity fine by RBA

Liquidity in fixed income markets "has been poor at times" but "the Australian banking system is in a strong liquidity position," Guy Debelle, deputy governor of the Reserve Bank said yesterday.

Debelle said Australian banks had raised "a significant amount of wholesale funding before the disruption to markets, and deposit inflows are robust.

"They are resilient to a period of market disruption.

"Spreads on Australian bank bonds have widened, although yields remain at levels that are still very low historically.

"We have not seen any particular sign of pressure in our daily market operations to date.
The spread between the bank bill swap rate and the expected policy rate (OIS) has risen in recent days but remains low, nothing at all like what occurred in GFC," Debelle said.

He argued "the liquidity environment has changed considerably in the past decade in response to changed regulations.

"The banking sector is much less willing and able to warehouse risk and provide liquidity than in the past," including to each other.

Turning to the currency, Debelle said "exchange rate volatility has been very low for a considerable period of time but has picked up in the past few days.

"However, it still remains considerably lower than volatility in other financial markets.

"The yen has appreciated by as much as 10 per cent against the US dollar, as Japanese investors repatriate funds, as normally occurs in these type of situations.

"More surprisingly, the euro has also appreciated against the US dollar.

"Market intelligence indicates that part of the reason for this is the liquidation of trades that were funded in euros and invested in higher yielding assets such as emerging market bonds. The sharp narrowing in the interest differential with the US has also contributed," he said.