Banks will be subject to a cap on the size of the committed liquidity facility they can access from the Reserve Bank of Australia from January 2015. The Australian Prudential Regulation Authority spelled out its approach to working out this cap yesterday, as well as its approach to reviewing banks' plans to make use of the CLF.The facility is being established to overcome an assumed shortage of government bonds through which banks can meet their target liquidity levels.APRA has previously said that each bank's annual funding strategy must "clearly state the amount of the CLF required in the forecast period."The bank regulator has now made clear that "the size of the CLF for each ADI [authorised deposit-taking institution] will be limited to a specified percentage of that ADI's Australian dollar net cash outflow target as agreed by APRA, plus an allowance for an appropriately sized buffer."The CLF will "be available to address Australian dollar liquidity needs only," APRA said.APRA said its "role in determining the appropriate size of the CLF" for larger banks will include:-- banks demonstrating "they have taken all reasonable steps towards meeting their liquidity requirements through their own balance sheet management, before relying on the CLF"-- meeting "relevant qualitative and quantitative liquidity requirements, including having in place a statement of the board's tolerance for liquidity risk"-- having "an appropriately robust liquidity transfer pricing mechanism"-- "and appropriate remuneration arrangements" for executives responsible for the ADI's funding plan and liquidity management, which might mean penalties for missing targets, as well as bonuses for meeting them.Banks will have to submit a three-year funding plan to APRA that "includes a forecast for Australian dollar net cash outflows over the CLF approval period," APRA said.APRA said it will assess each funding plan and the forecast of Australian dollar net cash outflows, "giving consideration to the planned program of actions that each ADI has in place to minimise reliance on the CLF."Glenn Stevens, governor of the Reserve Bank of Australia, has previously explained that the CLF "is a facility, for which the institutions concerned will pay a fee, which would provide cash against quality collateral pledged by institutions that the bank and APRA judge to be solvent."