New liquidity rules a safe bet: APRA

The banking regulator has bluntly rejected industry claims it is racing ahead of the world to implement rules designed to make lenders safer during times of financial stress.

To protect the world economy from financial shocks, authorities will force banks to hold larger amounts of easy-to-sell assets such as top-rated government bonds.

The local regulator plans to start the reforms from 2015, in contrast to overseas plans to delay the commencement until 2019. This conservative stance has sparked complaints from the banking lobby group that Australia was rushing ahead of the pack.

But the chairman of the Australian Prudential Regulation Authority, John Laker, dismissed claims Australia was ahead of the world on Tuesday night. He said several overseas competitors of the big four had already met the standards.

"We're not in the front of the pack," Dr Laker said.

"My view has been that we should be in the leading part of the convoy because the arrangements in Australia will allow our banks to meet that target by turning up a facility [operated by] the Reserve Bank."

Under the upcoming liquidity rules, banks must hold enough easy-to-sell assets to cover their lending outflows for a month - what APRA calls a "significantly severe liquidity stress scenario".

Dr Laker said the regulator was avoiding the opportunity to delay the reforms because the financial system was not under the same pressures as overseas. He also said the target would help curb risks from banks' reliance on volatile wholesale debt markets.

"The International Monetary Fund continually draws attention to the vulnerability of the Australian banking system to dislocation in offshore funding markets because our banks continue to rely on those markets," Dr Laker said.

"We think it's incumbent on our banking system to demonstrate, given that they have this reliance, that they are able to meet liquidity pressures."

To address a shortage of government bonds, the Reserve Bank will offer banks a "committed liquidity facility" giving them access to funds at 0.25 percentage points more than the cash rate.

It has been argued the facility is too generous to the banks, but Dr Laker said APRA would encourage banks to take "all reasonable efforts" to use their own balance sheets before using the facility.

"No prudential regulator around the world wants the central bank to become the lender of first resort," Dr Laker said.

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