APRA slashes liquidity available to lenders

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    The Australian Prudential Regulation Authority has cut the size of the liquidity facility available to lenders for the second time in two months, and signalled further reductions to come.

    APRA on Wednesday slashed the aggregate amount in the committed liquidity facility by $46 billion, according to a report by The Australian. The cut brings the facility to $142 billion.

    The reduction follows a $35 billion cut to the facility in November, weeks after the regulator announced its intention to roll back the facility over time.

    Liquidity rules require banks to hold enough high-quality liquid assets, like government bonds, to withstand a period of severe liquidity stress. The committed liquidity facility, which has been available to banks since 2015, was introduced when public debt levels were deemed too low to meet financial institutions’ liquidity needs, The Australian reported.

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    However, following “material improvements” in bank funding and liquidity and “unforeseen increases in government debt” since January 2020, all locally incorporated banks with access to the facility were asked to apply for a reduction, APRA said. Seven banks applied for the reduction, resulting in the $46 billion drop in the aggregate facility available, the regulator said.

    In November, five banks applied for a similar reduction. On Wednesday, APRA suggested the facility may soon be unneeded.

    “While APRA expects to ensure measured committed liquidity facility reductions to avoid financial market disruptions, it would be reasonable to expect that if government securities outstanding continue to increase beyond 2021, the committed liquidity facility may no longer be required in the foreseeable future,” the regulator said.

    APRA expects to reduce the facility again in April, The Australian reported.

    Original Article