Five banks applied for a reduction, reducing the aggregate CLF allocated to banks from A$223bn at 1 January 2020 to A$188 billion.
APRA (Australian Prudential Regulation Authority) has announced a AUD 35 billion (USD 25.5 billion) reduction in the aggregate amount in the CLF (Committed Liquidity Facility) established between the RBA (Reserve Bank of Australia) and certain banks that are subject to the LCR (liquidity coverage ratio) from the amount at the start of 2020.
The CLF was set up in 2015 as part of Australia’s implementation of the Basel III liquidity reforms. Under the LCR, banks need to hold enough HQLA (high quality liquid assets) to withstand a 30-day stress event.
The CLF is intended to be sufficient in size to compensate for the lack of sufficient available HQLA, which in Australia consists of mainly Australian Government Securities and securities issued by the borrowing authorities of the states and territories. Banks are required to make every reasonable effort to manage their liquidity risk through their own balance sheet management before applying for a CLF.
Due to the material improvements in banks’ funding and liquidity along with substantial HQLA increases due to unforeseen increases in government debt since the January 2020 CLF allocations, all locally incorporated LCR banks were invited to apply for a reduction in their CLF, effective on or before 31 December 2020.
Five banks applied for a reduction, reducing the aggregate CLF allocated to banks from AUD 223 billion at 1 January 2020 to AUD 188 billion.
According to APRA, the amount of Australian Government Securities and Semi-Government securities issued by the State and Territory governments has increased significantly and is projected to increase further based on the government’s recent budget announcement. As a result, APRA’s CLF allocations for 2021 will decrease further.
“While APRA expects to ensure measured CLF reductions to avoid financial market disruptions, it would be reasonable to expect that if government securities outstanding continue to increase beyond 2021, the CLF may no longer be required in the foreseeable future,” the regulator said.
Further to this round of reductions which are targeted to be effective from 1 December, applications for the 2021 CLF are due to be submitted to APRA in December 2020.
APRA aims to announce the aggregate results of those applications by the end of first quarter of 2021.