APRA plans to update its bank liquidity standard (APS 210), in the wake of the failure of Silicon Valley Bank and other banks in the US earlier this year. APRA chair John Lonsdale said the regulator is looking at changes to the minimum liquidity holdings approach used by smaller banks. He said APRA would also be looking at whether it is appropriate that banks hold each other’s securities for liquidity purposes. Under the liquidity coverage ratio rule introduced in 2015, authorised deposit-taking institutions must maintain an adequate level of high-quality liquid assets that can be converted into cash to meet liquidity needs for 30 days. Lonsdale, who was speaking at a Citi investment conference yesterday, said: “Our goal is to ensure all banks reflect the market value of their liquid assets for regulatory purposes and don’t get caught short the way SVB did.” APRA will also look at ways to strengthen resilience around interest rate risk in the banking book (IRRBB). APRA is the only regulator in the world that requires banks to carry capital to address the risk of rising interest rates as part of their core capital requirements. Lonsdale said the review of the IRRBB standard would focus on smaller banks to ensure they have an appropriate interest rate framework for their risks. APRA has recently issued a consultation paper on the design of additional tier 1 capital instruments, concerned that AT1 tends to absorb losses at a very late stage in a crisis, and that Australian banks’ practice of selling a large part of their AT1 issuance to retail investors makes it difficult to contemplate converting the hybrids to equity in a crisis and exposing investors to losses. Lonsdale reiterated comments he made earlier this year, when he said the key lesson from this year’s bank failures was the speed at which a bank run can now take place and spread to other institutions. “SVB faced outflows of an astonishing 85 per cent of its money in just two days, while First Republic Bank faced outflows of about 37 per cent of deposits over the same length of time. “Even the largest, most financially resilient, and best resourced banks would struggle to cope with deposit outflows of this volume and velocity. For smaller banks, it would be especially difficult.” He said this year’s events have also underlined the need for proactive supervision aimed at preventing bank crises. Lonsdale also provided some details from the latest authorised deposit-taking institution stress test, saying none of the 11 banks that took part breached their prudential requirements on capital. The stress test featured high inflation, 10 per cent unemployment and house prices falling by a third. “All retained sufficient liquidity and continued to provide credit to households and businesses. Although a hypothetical exercise, these results provide confidence in overall financial system resilience,” he said. The test was conducted using the revised bank capital framework that took effect this year. The framework (APS 110, APS 112 and APS 113) has been designed to embed “unquestionably strong” levels of capital. Higher capital buffers are the key change