APRA cuts aggregate committed liquidity facility by $46bn

The prudential regulator has for the second time in two months slashed the size of a liquidity facility available to the nation’s lenders.

The prudential regulator has slashed the size of a liquidity facility available to the nation’s lenders and flagged further there are reductions to come.

The prudential regulator has for the second time in two months slashed the size of a liquidity facility available to the nation’s lenders and flagged further reductions to come as banks lap up government debt in the post-Covid environment.

The Australian Prudential Regulation Authority on Wednesday reduced the aggregate amount in the “committed liquidity facility” by $46bn, bringing it down to $142bn.

It follows the regulator decreasing the facility by $35bn in November, weeks after it flagged its intention to roll it back over time.

Liquidity rules require banks to hold enough high-quality liquid assets, such as government bonds, to withstand a period of severe liquidity stress.

The committed liquidity facility has been available to banks since 2015 and was brought in when public debt levels were deemed too low to meet the liquidity needs of the banks.

Following “material improvements” in bank funding and liquidity, along with “unforeseen increases in government debt” since January 2020, all locally incorporated banks with access to the facility were invited to apply for a reduction in recent weeks, APRA said.

Seven banks applied for the reduction, resulting in the $46bn drop in the aggregate facility available, it said.

It follows five of the nation’s banks applying for a similar reduction in November.

APRA in late 2020 flagged its intention to roll back the liquidity facility alongside the corresponding rise in government debt.

The regulator on Wednesday suggested the facility may not be needed at all in the future.

“While APRA expects to ensure measured committed liquidity facility reductions to avoid financial market disruptions, it would be reasonable to expect that if government securities outstanding continue to increase beyond 2021, the committed liquidity facility may no longer be required in the foreseeable future,” the regulator said.

APRA expects to again reduce the facility in April.