Following a review, the Reserve Bank has assessed that Authorised Deposit-taking Institutions (ADIs) using the Committed Liquidity Facility (CLF) can increase their reasonable holdings of high-quality liquid assets (HQLA) from 26 to 27 per cent of the stock of HQLA securities by the end of 2020, and to 30 per cent of the stock of HQLA securities by the end of 2021. This assessment reflects the increase in issuance of HQLA securities in 2020 and in prospect for 2021.
As previously announced following the 2019 review of the CLF, on 1 January 2021 the CLF fee will increase from 17 to 20 basis points per annum on the size of the commitment to each ADI. The fee is set so that ADIs face similar financial incentives to meet their liquidity requirements through the CLF or by holding HQLA.
Since January 2015, the Reserve Bank has provided the CLF as part of Australia’s implementation of the Basel III liquidity reforms. Under APRA’s liquidity standard, ADIs that are required to meet the liquidity coverage ratio (LCR) need to hold enough HQLA to be able to respond to acute stress. The Australian dollar securities that have been assessed by APRA to meet the requirements to be HQLA are Australian Government Securities (AGS) and securities issued by the central borrowing authorities of the states and territories (semis). The CLF is required because the supply of AGS and semis in Australia has historically not been large relative to the value of HQLA that ADIs are required to hold under APRA’s liquidity standard.
As an alternative to holding HQLA to meet the LCR, ADIs can apply to APRA to establish a CLF with the Reserve Bank. This enables them to access a set amount of liquidity from the Reserve Bank under repo against eligible securities as collateral. These ADIs are required to meet several conditions, including paying the CLF fee. Each year, APRA sets the total size of the CLF by taking the difference between the liquidity requirements of the CLF ADIs and the amount of HQLA securities that the Reserve Bank assesses can be reasonably held by the CLF ADIs without unduly affecting market functioning. For more information, see Committed Liquidity Facility.
Following an earlier review, in June 2019, the Reserve Bank had assessed that ADIs using the CLF can increase their reasonable holdings of HQLA as a share of the stock of HQLA securities at a pace of 1 percentage point per year from 25 per cent in 2019 to 30 per cent in 2024. See https://www.rba.gov.au/media-releases/2019/mr-19-16.html. This more gradual increase in reasonable holdings is no longer required given the large increase in issuance of HQLA securities in 2020.