The Australian Prudential Regulation Authority will push ahead with two of the three proposed reforms, with a decision on the final measure – the phasing out of bank securities from the liquidity regime – on hold until at least 2025, the regulator confirmed on Wednesday.
It comes after small banks and credit unions argued against the proposed overhaul to the Minimum Liquidity Holdings regime that APRA flagged in late 2023, which was intended to reduce contagion risks in stress events.
Under the new rules, from July 2025, smaller lenders subject to the minimum liquidity holdings regime (large banks are captured under a different liquidity requirement) will have to adjust the value of their liquid assets regularly to account for movements in market prices and must also be “operationally ready” to provide key information on their financial position when requesting exceptional liquidity assistance.
But any decision on the third reform on removing bank securities from the liquidity regime is on hold until APRA’s planned broader review of liquidity risk, due to commence next year.
It was this reform in particular that had smaller banks up in arms. In its submission to the regulator, the Customer Owned Banking Association warned removing bank securities from the liquidity regime would “reduce many mutuals’ ability to sustainably operate and grow”.
“We expect that this will reduce banking competition and diversity in Australia,” the lobby group for mutual lenders wrote.
“Independent analysis shows that these changes will reduce sector profits in excess of $100m as mutual ADIs are forced to move into lower yielding securities and are subject to higher funding costs.”
APRA member Therese McCarthy Hockey on Wednesday said the regulator had sought to strike the appropriate balance between financial safety and other considerations including competition and efficiency with the reforms.
“Australia’s many small banks provide valuable services to communities across Australia, but to keep doing so into the future, they must remain financially resilient,” she said.
“The changes to liquidity requirements we have announced today will put these banks in a better position to withstand the types of liquidity shortfalls that saw multiple overseas banks fail or need rescuing last year.”
Deferring changes to APRA’s liquidity standard to the broader review would give the regulator an opportunity to engage further with industry concerns and consider a wider range of options to promote liquidity resilience, Ms McCarthy Hockey added.
COBA welcomed the move to delay any reforms on liquid assets.
“We thank APRA for actively listening to the significant concerns raised by customer-owned banks regarding its proposed changes to the Minimum Liquidity Holdings (MLH) regime,” COBA chief executive Michael Lawrence said.
“We welcome APRA’s decision to delay consideration of any reforms on MLH liquid assets to the regulator’s broader liquidity review, which allows crucial time for thorough consultation and engagement between the customer-owned banking sector and APRA.
“A proportionate MLH liquidity regime is critical for both competition and stability, and we remain committed to working collaboratively and constructively with APRA throughout the review.”
In recent weeks The Australianrevealed Treasurer Jim Chalmers was directly lobbiedby MPs to block APRA’s proposed changes following warnings a shake-up of liquidity standards, sparked by the collapse of Silicon Valley Bank and Credit Suisse in early 2023, could boost the lending dominance of the big four
