Liquidity debate stretched beyond 2011
Whether the domestic banks continue to issue bonds locally and offshore in record volumes in 2010 remains to be seen. A key factor may be the outcome of negotiations on proposed changes to APS 210 - APRA's prudential standard for ADI liquidity - although any resolution is now going to take longer than expected.
APRA wrote a letter to all ADIs on Friday to advise of the release of two consultative papers by the Basel Committee on Banking Supervision, the day before. The papers set out the committee's proposals to strengthen global capital and liquidity requirements.
APRA's own proposals are based on these but the Basel Committee has allowed a longer period for consultation and implementation. As a result, APRA advised that it will adjust its schedule to align with that of the Basel Committee's, with finalisation of its proposals now scheduled for mid-2011 and implementation to follow thereafter.
It is the changes to liquidity requirements, and now the prolonged uncertainty around these, that could impact the banks' issuance patterns. If the banks cannot continue to hold each other's paper, then domestic issuance will decline dramatically.
If the banks are required to hold more government bonds, then offshore issuance may well be even greater than that seen this year, assuming that international investors will be willing to hold even more Australian bank bonds and the banks maintain lending volumes.
The wild card in all of this could be covered bonds. Covered bonds would provide the banks with an alternative means of raising debt while also being of sufficient credit quality to be an acceptable asset to hold for liquidity purposes. Although again, any changes here could now be delayed.
While it will have to be a political decision, allowing the issuance of covered bonds may well be the compensation for accepting APRA's proposed changes to liquidity requirements. If covered bond issuance is approved, then bond issuance volumes will fall (at least in the short term) as covered bonds fall within the domain of structured finance.