APRA pushes banks towards longer-term funding
Australian Financial Review Mar 31 2016 7:10 PM
James Eyers
Fifteen of Australia's largest banks will have to meet new rules designed to limit over-reliance on short-term wholesale funding by January 1, 2018, the banking regulator said on Thursday.
Advisers said the move will push up bank funding costs as banks are forced to pay more for term deposits.
The Australian Prudential Regulation Authority said the banks will have to maintain a "net stable funding ratio" of "at least 100 per cent". A consultation paper released on Thursday provides detail on how the ratio is calculated. It is designed to ensure banks maintain a stable funding profile reflecting the composition of their assets and activities.
The net stable funding ratio (NSFR) assumes longer-term funding – which costs the banks more – is more stable than short-term funding. Longer-term funding includes three- or five-year bonds; short-term debt has tenor of less than a year.
The renewed focus on liquidity will force banks to lift the level of term deposits, as opposed to "at call" deposits, which will require them to offer depositors higher interest rates – a move that will put margins under pressure.
It is understood banks have been moving towards the 100 per cent level after APRA's consultations with the industry indicated its desire to see liquidity risks reduced.
'WORK TO DO'
KPMG risk partner Michael Cunningham said the banks "still have work to do" to meet the requirements, which will push up funding costs. "Generally, funding costs will increase as banks look to further term out the tenor of their balance sheets," he said.
Banks are also facing higher short-term funding costs as a result of market volatility, which will have a bigger impact on decisions to lift interest rates for customers.
APRA chairman Wayne Byres warned last September that some banks were not ready for the application of the NSFR. "Some further lengthening of Australian bank maturity profiles is therefore likely to be needed over time, to truly strengthen their funding resilience," Mr Byres said at the time.
APRA said in its discussion paper on Thursday that banks "have increased the amount of funding from more stable funding sources over the past seven years or so, reflecting an important lesson from the financial crisis as to the need for greater liquidity and funding resilience."
APRA's timeframe for compliance with the NSFR by January 1, 2018 is in line with market expectations.
SELF-SECURITISED ASSETS
However, banks may be surprised by APRA's position on self-securitised assets. All the major banks carry substantial balances of self-securitised mortgages on their books, which can be used to qualify for the liquidity coverage ratio. But APRA said on Thursday that "it is not appropriate to recognise self-securitised assets as being equivalent to high quality liquid assets for NSFR purposes".
APRA said the 15 banks that will be subject to NSFR account for 89 per cent of the total resident assets of the Australian banking system.
APRA's consultation on the NSFR comes as banks grapple with a complex new world of regulation that is making managing capital more challenging.
The NSFR ratio seeks to ensure that long term assets are financed with at least a minimum amount of stable funding. It is defined as the ratio of the amount of available stable funding (ASF) to the amount of required stable funding (RSF). The NSFR is one of the four main pillars of the regulatory reforms known as Basel 3; the others were strengthening the risk-based capital framework, a backstop leverage ratio and the liquidity coverage ratio.
The liquidity coverage ratio (LCR) seeks to ensure that it has sufficient high-quality liquid assets to survive a significant stress event lasting for 30 days.
APRA said on Thursday the LCR and NSFR "will serve to reinforce and maintain those improvements in [bank] funding profiles".
"These improvements will also be an important consideration, in addition to capital strength, when determining how to implement the FSI's recommendation regarding 'unquestionably strong' [banks]."
COMPLIANCE COSTS
APRA has asked banks to provide, by May 31, information on the costs associated with the NSFR changes. "Specifically, information is sought on any increases or decreases to the compliance costs incurred by businesses as a result of this proposal," APRA said. Bank submissions will be made public unless banks request confidentiality.
Mr Byres said last September the NSFR and LCR might ultimately have a larger impact on banks than the rules on capital levels.
"These measures potentially have a greater impact on the Australian banking sector, given its excess of loans over deposits and its reliance on wholesale funding, than any of the changes to the capital framework."
APRA's discussion paper on Thursday also contains proposals for a liquid assets requirement for foreign banks. The regulator is proposing to either keep the existing regime or replace it with a simple metric requiring foreign bank branches to hold specified liquid assets equal to at least 9 per cent of external liabilities. APRA said the latter position was its preferred option.
Mr Cunningham said both domestic and foreign banks are likely to ask many questions of APRA during the consultation, regarding various definitions used to calculate the ratio.