Stevens defends liquidity facility

Ian Rogers
Reserve Bank governor Glenn Stevens used a speech to the ASIC Annual Forum yesterday to rubbish recent efforts to portray the "committed liquidity facility" - that will help Australia banks meet the Basel III liquidity standard - as a "bail out fund."

Earlier this month, The Australian Financial Review gave prominence to a commentary by Christopher Joye (a director of Yellow Brick Road) which said that, through the facility, the "the Reserve Bank of Australia will supply banks with a permanent bailout facility worth up to A$380 billion by 2015."

According to the AFR's version of what this facility is: "There has been no public debate about the establishment of the facility, the terms under which banks can use it, the risks to which it exposes taxpayers, or the absence of independent oversight of the handful of officials who control it."

These claims were attacked on the day by the Australian Bankers Association and rebutted in detail the following day by News Limited's columnist Terry McCrann.

Now Stevens has found a forum from which he can respond.

"Let me say a little about this facility," he said. "It is not a 'bail-out' fund for banks. 'Bail-outs' usually mean stumping up public funds to inject capital [in]to an institution whose solvency is in question.

"The CLF does no such thing. It 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.

"The fee structure is designed to replicate the cost the institutions would incur if there were sufficient ordinary high quality collateral - i.e. government debt - for them to hold to meet the Basel liquidity requirements - which, of course, there is not.

"If we are to meet the global standards, we either have to have a facility like this, or have the government issue a few hundred billion dollars in extra gross debt so the banks can hold it.

"The relevant ADIs will pay a fee of 15 basis points per annum for the facility whether they use it or not. If they do use it, any funding will be at an interest rate that is 25 basis points above the market rate.

"This has been developed openly, and under the scrutiny of the international regulatory community. It was approved by the Reserve Bank Board in November 2010."

The Australian Prudential Regulation Authority and the Reserve Bank announced their plan to introduce the facility soon after this.