LCR making its presence felt in capital markets

The Australian Prudential Regulation Authority has observed a number of changes to bank products features as a result of the introduction of the liquidity coverage ratio rule in January.

APRA executive general manager Charles Littrell said these included longer bank bill terms and the offer of more 31-day notice accounts for wholesale and retail depositors.

Under the new LCR rule, ADIs 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. Retail deposits are divided into "stable" and "less stable" portfolios.

APRA's liquidity standard (APS 210) says: "Cash outflows related to fixed or term deposits with a residual maturity or withdrawal notice period of greater then 30 days will be excluded from LCR calculations if the depositor has no legal right to withdraw deposits within the 30-day horizon of the LCR."

Speaking at the KangaNews Debt Capital Markets Summit in Sydney yesterday, Littrell said: "APRA and ASIC have worked to reduce the presumption that retail term deposits have a free break in less than 30 days."

This condition has pushed banks to target deposits that can't be withdrawn before 31 days.

Littrell said: "In the wholesale market we are seeing the 30-day LCR time frame move average bank bill tenors out a few months. We are also seeing 31-day notice accounts for wholesale and retail depositors."

Part of the LCR arrangement is the provision of a committed liquidity facility, managed by the Reserve Bank, which allows banks to secure collateralised lines of credit that can be drawn on for liquidity.

Littrell said the RBA's collateral terms allowed for many classes of fixed income security to be included, which may encourage bank holdings in these instruments.

"However, over time APRA and the RBA expect the banking sector to progress towards more stand-alone liquidity, with less reliance on the public sector," he said.

"This means, among other things, that CLF as a proportion of balance sheets should drop over time."