APRA’s directive to ADIs that they cut their reliance on the Committed Liquidity Facility to zero by the end of next year will hit banks’ net interest margins and increase the cost of issuance in some sectors of the capital markets, particularly mortgage-backed securities.
The CLF was set up by the Reserve Bank to meet any shortfall in the availability of high-quality liquid assets (government and semi-government bonds) that ADIs would need to meet their liquidity requirements.
Under the liquidity coverage ratio rule introduced in 2015, ADIs must maintain an adequate level of high-quality liquid assets that can be converted into cash to meet liquidity needs for 30 days under stressed conditions.
APRA wrote to ADIs late last week, saying that it and the Reserve Bank have determined that, with the significant increase in government and semi-government bond issuance in the past year, there are sufficient high quality liquid assets for ADIs to meet their LCR requirements without the need for the CLF.
APRA’s view is that ADIs should make every reasonable effort to manage their liquidity risk through their own balance sheets.
Based on their most recent disclosures, ANZ falls back on A$11 billion of CLF balances, Commonwealth Bank $30 billion, NAB $31 billion and Westpac $37 billion.
Under the CLF, the RBA will provide funds in periods of liquidity stress. Those funds are secured against self-securitised mortgages (which accounts for about 70 per cent of CLF collateral), bank paper, supranational bonds and asset-backed securities.
The banks pay a fee to the RBA for use of the facility but they avoid having to hold low-yielding government and semi-government securities on their balance sheets.
Macquarie Securities has estimated that the move to zero CLF will cost the major banks 1 to 2 basis points of net interest margin. ANZ will experience the least impact, at around 0.9 bps, given its low balance.
The margin impact for CBA will be around 1.3 bps, for NAB 1.6 bps and for Westpac 1.9 bps.
Macquarie cautions that the impact is hard to measure, given different funding mixes and the banks’ high LCR ratios currently.
According to CBA’s 2020/21 financial report, the bank’s liquidity coverage ratio is 129 per cent – well above the regulatory minimum of 100 per cent. While banks have consistently maintained LCRs above 100 per cent and would be expected to continue to do so, there may be scope to run the ratios down a little.
As to the capital markets impact, Coolabah Capital chief investment officer Christopher Joye wrote in Livewire on Friday that banks were big buyers of other banks’ senior paper and RMBS for their CLF balances. Reduced demand for these securities could see margins widen by around 30 bps.
Joye also cautions that the impacts are hard to measure, especially in the securitisation market, where the strong performance of Australian RMBS has resulted in a bigger pool of local and overseas “real money” buyers in recent years.