RBA weans banks off CLF
The Reserve Bank is increasing the fee for use of its Committed Liquidity Facility because it wants banks to hold more high-quality liquid assets and rely less on the CLF.RBA assistant governor Christopher Kent addressed a Bloomberg conference in Sydney yesterday, explaining the background to the central bank's announcement last month that ADIs could increase their holdings of stock of HQLA securities and that the CLF fee would be increased.In the five years since the CLF was introduced to provide banks with a guaranteed source of liquidity, 15 banks have applied for access. None have needed to draw on the facility.Kent said the size of the CLF was set at A$274 billion in 2015. Since then the stock of Australian government securities and semi-government securities has increased by almost a third, while the liquidity coverage ratio requirements of the banks have been little changed.The increase in AGS and semis means that the shortage of HQLA is not as large as it once was, although there is still a shortage.Kent said this meant the banks could hold more HQLA securities compared with their liquidity needs. As a result, the size of the CLF has declined to just below $250 billion.He said that since the CLF was introduced, the banks have "consistently overestimated their net cash outflow projections in their CLF applications for the following year. The banks have also been holding fewer HQLA securities than the RBA judged they could reasonably hold."Taken together, these observations suggest that the CLF fee should be set at a higher rate in the future," Kent said.The fee will rise from 15 to 20 basis points, starting with an increase to 17 bps in January next year and then 21 bps in January 2021."A higher CLF fee will help make the banks indifferent between holding more HQLA securities and asking for a larger CLF," Kent said.The other change is that ADIs using the CLF facility can increase their holdings of HQLA from 25 to 30 per cent of the stock of HQLA securities. The increase will start next year and rise by one percentage point per year until 2024.To assess the amount of HQLA securities that the banks can hold, the RBA considers the behaviour of other holders of these securities, as well as conditions in bond and repo markets."In 2015, a large share of Australian government debt was held by what can be described as 'buy and hold' investors. These investors typically did not contribute to liquidity in the market," Kent said."However, over recent years more HQLA securities have become available for use as collateral. In particular, the Australian repo market has grown substantially."Also, our analysis of transactions in bond and repo markets demonstrates that most HQLA securities were being actively traded."Given this, it appears unlikely that a moderate increase in banks' holdings of Australian government securities and semis would present a problem for liquidity in these markets."