On 6 August, the Australian Federal Treasurer
tabled the
Council of Financial Regulators (CFR) review into small and medium sized banks, examining the regulatory and market trends affecting their competitiveness and the current and potential sources of and barriers to competition from these sectors.
The review makes 9 recommendations for the Government and sets out 9 actions for regulators. The Government has accepted, in principle, 8 recommendations and will seek feedback on the final recommendation for APRA to introduce a lighter touch framework for very small banks, accompanied by adjustments to the Financial Claims Scheme.
On 7 August, APRA announced its
plans to support small and medium banks. APRA will make changes to its banking framework to increase proportionality and reduce regulatory burden as part of the CFR Review into Small and Medium-sized Banks. Importantly APRA stated “
The review also identified other actions that require cooperation across multiple regulators and legislative reform. ….. As part of this, APRA will review whether covered bonds should qualify as high-quality liquid assets (HQLA), taking into account planned changes to issuance limits”.
In relation to Funding, Recommendation 8 in the CFR report is that the Government should consider increasing the amount of Australian assets that can be committed to covered bond cover pools from 8 to 12 per cent. In fact, this follows one of the proposals put forward by the ASF in its
submission of 7 February.
The ASF, like some other respondents, also argued for covered bonds to be included as eligible HQLA instruments under the Liquidity Coverage Ratio (LCR) regime, to help develop the domestic Australian covered bond market. The potential addition of covered bonds to the Australian liquidity framework could also assist any issues of reciprocity when assessing the third country equivalence regime for covered bond investment in Europe. However, there are several implications that the CFR agencies would need to consider:
- HQLA: Increasing the issuance limit could improve the size and depth of the domestic covered bond market. Accordingly, APRA would need to assess whether to broaden the definition of HQLA to include covered bonds. APRA plans to look at this issue as part of a broader future review of Prudential Standard APS 210: Liquidity.
- Asset encumbrance: A higher covered bond limit would increase asset encumbrance. This has implications for depositor protection, as well as wider financial stability, since encumbered assets would not be available to obtain additional secured borrowing from other sources, such as RBA facilities. As a result, APRA will need to consider whether any controls are needed for a bank’s overall level of asset encumbrance.
Other funding issues addressed in the CFR review included a publicly backed residential mortgage-backed securities program and a publicly backed multi-seller securitisation. Neither of these proposals were supported but the CFR remains open to considering an effective industry sponsored model that provides resilient sources of finance particularly in times of economic crisis.