Basel III liquidity reforms - high quality assets and implementation date unchanged

The Australian Prudential Regulatory Authority (APRA) has just released its response to the amendments to the Liquidity Coverage Ratio (LCR) reforms proposed by the Basel Committee in January 2013. Very briefly the Basel Committee had proposed:

• that the range of assets allowed to be included in the liquid asset pool be widened to include some equities, lower rated corporate bonds and MBS (though with substantial haircuts and tight limits on amounts);
• that the implementation date for compliance be pushed out 4 years to 2019, with banks required to be 60% compliant by 2015; and
• that the stress tests for the calculation of the level of liquid assets held be watered down somewhat.

APRA’s discussion paper on implementing the Basel III liquidity reforms proposes to only adopt these changes to a limited extent:

• High quality liquid assets (HQLAs): Most critically there won’t be any change to APRA’s definition of HQLAs. These are still restricted to cash balances with the RBA and Commonwealth and semi-government securities. Major banks will continue to be able to access the RBA’s liquidity facility for a fee.
• Start date: APRA proposes to continue with a January 2015 start date for implementation of the liquidity reforms. However APRA commented that in Australia “most internationally active banks are already compliant with the LCR”.
• Level of liquid assets: Finally, for the most part APRA will adopt the revised Basel III cash inflow and outflow assumptions. This may be a small positive for bank margins given the lower LCR requirement will reduce the fees paid to access the RBA’s liquidity facility. In addition, should the favourable treatment of certain non-retail deposits under the LCR carry across to the Net Stable Funding Ratio (NSFR) calculation (currently under review), this will allow banks to compete less aggressively on retail and SME deposits which have been a large source of drag on margins in recent periods.

Overall we believe the proposed changes are a small net positive for the Australian major banks given the beneficial impact on bank margins from a lower LCR requirement.