RBA unveils CLF to help banks with Basel III
(24 November 2011 — Australia) The Reserve Bank of Australia (RBA) assistant governor Guy Debelle spelled out the intention behind a proposed Committed Liquidity Facility (CLF) that would help local banks meet tough new standards set under Basel III.
The central bank said the decision to accept certain mortgages as collateral for loans was intended to discourage banks from holding too much of each other’s debt, so reducing systemic risk in the system as a whole.
One notable decision was to allow banks to use so-called self-securitised residential mortgage-backed securities (RMBS) to obtain funding under the CLF. These are home loans bundled into a security and held on the bank's own balance sheet.
'The primary motivation is to reduce the systemic risk of excessive cross-holdings of bank-issued instruments,' Debelle explained.
A large proportion of the securities on issue in Australia are issued by the banks themselves and each has large holdings of debt issued by the others. Therefore, the primary type of asset available to the banking system to meet its liquidity needs is a security issued by another bank.
'In our judgment it would be undesirable for a bank to meet its liquidity needs by significantly increasing its exposure to the rest of the banking system,' said Debelle.
If a stressed situation was to arise at one bank, the increased cross-holdings could rapidly translate this to other banks, he said. Should a stressed bank try and meet its liquidity needs by selling the securities of another bank, the contagion could spread.
'Thus to reduce the likelihood of systemic risk, a bank will be able to hold some share of its liquid assets in the form of self-securitised mortgages,' said Debelle.
The RBA has set a margin of 10 percent on asset-backed securities. But self-securitised mortgages will be valued at a price equal to 90 percent of par, before the margin is set.
Thus to obtain liquidity of A$100 under the CLF, a bank would need to present a self-securitised RMBS with a value of A$122, said Debelle.
To access the CLF the RBA has set a fee of 15 basis points, which was actually well below what many banks had feared.
'The RBA concluded that the fee needed to be set high enough to ensure banks had the appropriate incentives under the liquidity standard, but low enough to not generate unwarranted distortions in the domestic market,' said Debelle.
One notable decision was to allow banks to use so-called self-securitised residential mortgage-backed securities (RMBS) to obtain funding under the CLF. These are home loans bundled into a security and held on the bank's own balance sheet.
'The primary motivation is to reduce the systemic risk of excessive cross-holdings of bank-issued instruments,' Debelle explained.
A large proportion of the securities on issue in Australia are issued by the banks themselves and each has large holdings of debt issued by the others. Therefore, the primary type of asset available to the banking system to meet its liquidity needs is a security issued by another bank.
'In our judgment it would be undesirable for a bank to meet its liquidity needs by significantly increasing its exposure to the rest of the banking system,' said Debelle.
If a stressed situation was to arise at one bank, the increased cross-holdings could rapidly translate this to other banks, he said. Should a stressed bank try and meet its liquidity needs by selling the securities of another bank, the contagion could spread.
'Thus to reduce the likelihood of systemic risk, a bank will be able to hold some share of its liquid assets in the form of self-securitised mortgages,' said Debelle.
The RBA has set a margin of 10 percent on asset-backed securities. But self-securitised mortgages will be valued at a price equal to 90 percent of par, before the margin is set.
Thus to obtain liquidity of A$100 under the CLF, a bank would need to present a self-securitised RMBS with a value of A$122, said Debelle.
To access the CLF the RBA has set a fee of 15 basis points, which was actually well below what many banks had feared.
'The RBA concluded that the fee needed to be set high enough to ensure banks had the appropriate incentives under the liquidity standard, but low enough to not generate unwarranted distortions in the domestic market,' said Debelle.
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