Banks make smooth transition to LCR

ANZ and Westpac have had no trouble meeting their obligations under new liquidity coverage ratio rules, with both banks reporting ratios in excess of the minimum requirement. However, the new rule is likely to reduce the banks' returns on their liquid assets and also reduce treasury income.

Under the new LCR rule, which took effect on January 1, authorised deposit-taking institutions must maintain an adequate level of high-quality liquid assets that can be converted into cash to meet liquidity needs for 30 days.

To determine the appropriate LCR, banks must estimate their net cash outflow over 30 days under stressed conditions, with higher runoff rates to apply to less stable deposits.

ANZ reported that its LCR ratio at the end of March was 119 per cent. It calculated that its 30-day cash outflows under a stress scenario would be A$121 billion of customer deposits and off-balance sheet funding, and $24 billion of wholesale funding.

Its liquid assets were made up of $107 billion of high quality liquid assets, $49 billion of internal residential mortgage-backed securities and $17 billion of alternative liquid assets.

With a ratio of 119 per cent, the bank has a surplus of $28 billion, even though it is only required to have an LCR ratio of 100 per cent.

The bank said a surplus of deposits in its Institutional and International Banking division contributed to the LCR - an unexpected benefit of its Asian strategy.

Westpac's LCR was 114 per cent. It calculated that 30-day cash outflows would be $108 billion. Its $123 billion of LCR liquid assets gave it a $15 billion buffer. Its LCR assets were made up of $57 billion of high quality liquid assets and $66 billion of committed liquidity facility.

Westpac said the introduction of the LCR rule had prompted the bank to change the mix of deposits away from lower quality to higher quality retail and non-financial institution deposits.

The bank said returns on liquid asset holdings had been affected by the introduction of LCR, because of the requirement to hold a significant proportion of assets in low-yielding, high quality liquid assets.

The change has also had an impact on the bank treasury income because high quality liquid assets tend to be long-term holdings and not actively traded.