APRA strengthens bank liquidity rules

APRA has announced finalised reforms aimed at bolstering the liquidity and capital requirements of banks.

The measures are designed to enhance banks’ resilience in the face of future financial stress.

Background and consultation on liquidity rules

In response to the lessons learned from the 2023 banking crisis in the United States and Europe, APRA initiated a consultation on liquidity arrangements last November.

The three-month consultation period saw 35 submissions from various entities, individuals, and industry bodies.

APRA member Therese McCarthy Hockey (pictured above) emphasised the balanced approach.

“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 in a media release.

Key reforms

The two key reforms that will come into effect from July 1, 2025 are:

• Banks under the Minimum Liquidity Holdings (MLH) regime must regularly adjust the value of their liquid assets based on market price movements.
• All banks must be ready to provide critical financial information when requesting exceptional liquidity assistance (ELA) from the Reserve Bank.

APRA’s deferred proposal

APRA has deferred the proposal to phase out bank debt securities as liquid assets for MLH banks. The decision will be revisited during APRA’s broader review of liquidity risk next year.

This broader review will allow for a more comprehensive evaluation of the MLH regime.

Expectations for banks

APRA expects MLH banks to diversify their liquidity portfolios as per existing guidelines.

Annual reviews of liquid assets, in accordance with Prudential Standard APS 210 Liquidity (APS 210), should be submitted to APRA by July 1, 2025.

APRA will provide heightened supervisory attention to banks with significant concentrations of bank debt securities.

Industry engagement

Hockey highlighted the importance of ongoing engagement.

“In deferring changes to APRA’s liquidity standard to the broader review, we have the opportunity to engage further with industry concerns and consider a wider range of options to promote liquidity resilience,” she said.

The response paper, along with updated versions of APS 210 and Prudential Practice Guide APG 210 Liquidity, is available on the APRA website.

For further information on liquidity in banking, visit: APRA Explains: Liquidity in banking | APRA.

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