if the euro collapses?, page-38

Timber,

as a financial connoisseur you seem to be very familiar with the history of Basel regulatory requirements. Here is how the London banker sees the developments from the regulatory changes as they happened in the markets:

'So the current financial crisis started with bad mortgage debt, spread to bad bank debt, carried over into bad agency debt, and now encompasses bad sovereign debt. Each of these categories was given preferential capital weighting under the Basle Accords, and now all are haemorrhaging, open sores on the financial system and the stability of excessively indebted governments.

Not only did the Basle weightings encourage poor risk assessment, they directly contributed to the inadequate capitalisation of banks for the risks they assumed.'

I happen to agree with him. Because of the latest changes (Basel III), regulators everywhere are demanding that banks set aside larger amounts of high-quality liquid assets to help them withstand periods of market stress (credit crunch).

The securities generally deemed acceptable are AAA-government bonds. However, in Australia there is (apparently) a shortage of AAA rated government bonds. Not a surprise given that close to 80% of the government debt is owned by foreigners.
That is a problem for the RBA and other regulatory authorities. Australian banks successfully borrowed from international money markets and lent in the highly illiquid mortgage markets. How to transform illiquid assets (RMBS) to liquid ones? Well that is where the RBA (with the help of AOFM, APRA and government) stepped in to help.

Here is the solution to the problem - create a brand new facility, quote:

"As foreshadowed last December, the Reserve Bank will provide a committed liquidity facility (CLF) as part of Australia’s implementation of the Basel III liquidity reforms. Details of APRA’s proposed implementation of the Basel III liquidity standard are being released concurrently with this announcement. For further details see Implementing Basel III liquidity reforms in Australia. The facility, which is required because of the limited amount of government debt in Australia, is designed to ensure that participating authorised deposit-taking institutions (ADIs) have enough access to liquidity to respond to an acute stress scenario, as specified under the liquidity standard."

Link to

Guy Debelle, Assistant Governor of the RBA speech

So the financial sector liquidity problem has been solved, but how about the long-term solvency issue? Well, if the Oz RMBS market remains AAA than yes. If not, we are potentially facing a lot of 'toxic assets' in the system.