LCR not set in stone

The end of the committed liquidity facility (CLF) will inevitably have an impact on major-bank issuance needs as the banks will need to fund increased holdings of high-quality liquid assets (HQLAs). The impact may be offset to some extent by the fact the majors have all been running liquidity-coverage ratios (LCRs) well above the regulatory minimum.

DAVISON All the major banks were well above the LCR minimum at their most recent reporting point: it has been suggested they could maintain regulatory compliance and still reduce their aggregate holdings of liquid assets by something like A$60 billion (US$42.5 billion). Is this a likely approach? Are LCRs above the banks’ level of comfort and is there some flexibility on this basis?

KAU Yes. ANZ Banking Group’s is probably a little higher still, and we are looking to normalise it and run it a little less conservatively going forward. We have front-run the CLF reduction and the extra LCR buffer will also help.

BLACKSTOCK We have also been above our LCR target level through the whole pandemic period. There is every possibility we could bring it down back to within the target – this is one of the levers we can pull.

The other thing to consider is that we have seen a shortening of the duration of our deposit book, partly because of the low-rate environment – and this has an impact on NCOs [net cash outflows]. LCR is a percentage number that benefits when deposits start to term out again, which reduces the NCO number.

JOHNSON LCRs and NSFRs [net stable-funding ratios] became elevated from the start of the pandemic. In offshore jurisdictions like the US and Canada, LCRs have started to normalise.

It is not something we have come to a conclusion on. It primarily goes back to the question of where we see the funding task with all the inputs we have discussed. But it is something we have looked at in the sense that there has been a significant buffer run up throughout the last 18 months.

PERRIGNON Looking at the numerator of the LCR, APS 210 actually mentions a number of subset liquid assets including covered bonds and supranational, sovereign and agency securities. But they are underpinned by a supplementary clause in APS 210 that requires deep and liquid markets for these securities. Is there any expectation the regulatory framework may change?

KAU There is quite a degree of subjectivity in some of the APS 210 assumptions. It is not particularly prescriptive in a lot of cases so there are likely to be ongoing changes as a result.

BLACKSTOCK The structure of deposits also has an impact. It is not just the amount of HQLAs a bank has – there are inputs on both sides.

We have been above our LCR target level through the whole pandemic period. There is every possibility we could bring it down back to within the target – this is one of the levers we can pull.

FERGUS BLACKSTOCK COMMONWEALTH BANK OF AUSTRALIA

Back to feature