APRA's bank-friendly regulatory surprise
Unexpectedly, and with very little fanfare, the prudential regulator has increased the system Committed Liquidity Facility (CLF) granted for 2018 by $25 billion.
Previously, the prudential regulator seemed intent on weaning the banks off the central bank’s synthetic liquidity back-stop by reducing the CLF. In 2015, the CLF was $275 billion, in 2016 that figure fell to $245 billion, in 2017 it dropped to $223 billion before rising in 2018 to $248 billion.
Given the shortage of government bond issuance, the Australian banks only meet the liquidity coverage ratio constraint by virtue of access to the CLF, which is priced at 15 basis points undrawn. This compares to an estimated 55 basis points of funding a qualifying government bond investment with three-year debt.
The previous declining access to the CLF was net interest margin dilutive, it constrained credit growth and also created a structural negative impact on the net stable funding ratio, according to CLSA banking analyst Brian Johnson.
A falling CLF is dilutive in the sense that the smaller the CLF, the more lower yielding high-quality liquidity assets (HQLA) the banks had to hold.
"As such, the increase in the 2018 CLF is slightly favourable to bank NIM (-0.2 basis points versus 2017 -0.4 basis points), it slightly eases the mechanical credit growth constraint imposed by the LCR, and it increases the net stable funding ratios by between 1 per cent and 1.5 per cent," said Johnson.
“This is just optical. Australian banks still seem to run significant borrow short /lend long mismatches, it’s just that the government-supplied CLF transfers the risk to the public sector!"
APRA’s apparent acquiescence in increasing the CLF is not the only bank-friendly regulatory development, he went on to say, specifically APRA’s “unquestionably strong” 10.5 per cent common equity tier one capital targets are way more benign than in its previous messaging.
“This all feels good but perhaps it’s just about the optics of the sector reporting stronger, albeit public-sector backed, regulatory ratios (ie, core equity tier 1, liquidity coverage ratio and net stable funding ratio)," said Johnson.
“Perhaps APRA is just extending the timeline for Australian banks to address the structural weaknesses in their business models. For example, why is the Australian bank counter cyclical capital buffer set at zero when regulators clearly have concerns about housing loan concentrations and are already imposing macro prudential brakes?"
The CLF is intended to be of sufficient size to compensate for the lack of eligible HQLAs in Australia for ADIs to meet their iquidity coverage ratio (LCR) requirements. One of the Basel Committee on Banking Supervision’s post-GFC reforms is the LCR that requires banks to hold sufficient HQLAs to withstand a 30-day period of stress.
Australia doesn’t have enough HQLAs – cash, commonwealth and state government bonds – to meet the LCR, therefore the Australian regulators negotiated an arrangement whereby the Reserve Bank of Australia (RBA) accepts banks’ securities and internal securitisations as collateral should it have to provide liquidity support to lenders.
According to KPMG risk partner Michael Cunningham, it was surprising that given a year-on-year 3 per cent decline in APRA’s total forecast net cash outflow and a 3 per cent increase in HQLAs that the CLF has increased by 11 per cent to $248 billion, rather than all-things-being-equal, decreasing.
Banks typically run LCR buffers well in excess of 100 per cent - the four majors have an average LCR of 129 per cent - between 122 per cent and 135 per cent.
“We understand that APRA is allowing banks to include larger LCR requirements in their modelling. So, it’s plausible that the larger-modelled buffers held offset to some degree increased availability of HQLAs and lower NCOs.”