On Friday, the Basel Committee and Australian authorities unveiled a compromise that will allow Australia to meet the Basel III minimum liquidity standards.The Basel III liquidity standards require banks to hold 30 days worth of high-quality liquid assets, mostly government bonds, giving them a source of funds in the next banking crisis. Australia and a few other nations, such as Singapore and Saudi Arabia, have faced a problem with these proposed standards: a shortage of government bonds, because their governments don't owe enough money.Under the compromise announced on Friday, Australia's top 40 authorised deposit-taking institutions will be able to set up a secured lending facility with the RBA. It will be possible to secure this facility with any assets currently listed by the RBA as eligible for repurchase transactions. This list includes not just government and semi-government securities, but bank bills, asset-backed commercial paper and residential mortgage-backed securities.The compromise mechanism has been negotiated over several months by a sub-committee of the Basel Committee, on which both the Australian Prudential Regulation Authority and the Reserve Bank of Australia are represented. The aim of the mechanism is to leave Australian ADIs with precisely the same incentives under the Basel III liquidity rules as their overseas counterparts, who can access a larger stock of government bonds.ADIs will pay a fee to use the facility. This fee is designed to eliminate the yield premium they receive from holding non-government rather than government paper, and to encourage ADIs to hold government paper whenever it is available.Other alternatives were explored but rejected in the Basel Committee negotiations. Allowing Australian ADIs to hold foreign governments' debt introduced unwanted exchange rate risks. While other debt types, such as AAA-rated residential mortgage-backed securities, don't trade in deep and liquid markets in Australia, and many are issued by banks in the first place.Law firm Clayton Utz argued in a note on Friday that the announcement was more good news for the Australian asset-backed securities market, as it would drive additional demand for asset-backed paper. This demand may arrive slowly though; the Basel III liquidity standards only apply from 2015.APRA said it intends to apply the new mechanism to larger ADIs only. These currently number around 40. Smaller retail ADIs, including most credit unions, will continue to follow a simpler rule: the minimum liquid holdings (MLH) regime.Details of the RBA liquidity facility and APRA's approach to the Basel liquidity framework will be "subject to consultation during 2011 and 2012", the two groups said.