Demand specifics: domestic banks
Liquidity regulation and market conditions for the Australian bank sector continue to evolve. If anything, this key buyer base for local government-sector issuers might have more demand at the margin as a result.
KELLY I get the impression with the TFF that lots of market participants are waiting for a cliff-type event – and I don’t believe this will happen. I would argue we are so far through the TFF repayment process
that we have already seen the bulk of changes in primary and secondary activity from the major-bank balance sheets.
It is a significant change to our market for sure. But the semis, in conjunction with our bank counterparties,
have been working on diversifying their investor base for a long time. We are well positioned for the roll-off.
McCOLOUGH The TFF is paid back now but surplus exchange settlement (ES) balances at the RBA [Reserve Bank of Australia] still account for more than A$200 billion (US$134.5 billion). There is still a very large amount of liquidity in the system, in other words – but it will dial back organically from
now on unless the RBA does active quantitative tightening, which is not on the agenda.
Based on this organic run-off, and holding all else equal, the total ES balance will come off by A$36 billion this financial year and about A$46 billion in the next one. It is right that as ES balances fall theoretically it translates into higher HQLA [high-quality liquid asset] requirements, but there are
a lot of spinning wheels to this equation. As ES balances fall so will net cash outflows, which is what the liquidity coverage ratio is all about.
A lot of assumptions go into estimating ADI [authorised deposit-taking institution] demand, but I think the
number one piece is what volume of reserves stays out there. Then it becomes a matter of cash-flow
management and preferences within HQLA portfolios.
The bottom line is that if there was going to be huge disruption, I think we would have seen it by now. The most recent ABS update said about 60 per cent of semi-government bonds is owned by ADIs, which is the same level as the quarter before.
The bottom line is that if there was going to be huge disruption, I think we would have seen it by now. The most recent ABS [Australian Bureau of Statistics] update said about 60 per cent of semigovernment bonds is owned by ADIs, which is the same level as the quarter before.
Banks are a substantial investor and will remain as such. Putting aside assumptions about ES balances and balance sheet growth, if the banks have the full amount in semis and ACGBs [Australian Commonwealth government bonds] that they want, they still need to replace maturities at a substantial rate.
The one factor we don’t know is the point at which the RBA decides there are ample reserves in the system. Until we get to that stage, I suspect we are in a holding pattern for ADI demand at present. Going forward, though, I suspect it will be consistent with what we have come to expect.
McCOLOUGH We expect about A$5 billion a year in additional demand, with about A$20 billion of buying over the transition period – slightly more in the first year, up to A$10 billion, then A$5 billion on a running basis. I think we can say A$10 billion is a substantial amount, so smaller banks will contribute to positive demand flows. But I doubt it will materially change the market.
