Australian Prudential Regulatory Authority, 2009,“APRA’s Prudential Approach to ADI Liquidity Risk,” Discussion Paper, September 11.
Basel Committee on Banking Supervision, 2009a, International Framework for Liquidity Risk Measurement, Standards and Monitoring, December.
Basel Committee on Banking Supervision, 2010a, Press Release, July 26.
Basel Committee on Banking Supervision, 2010b, Press Release, September 12.
Battellino R., 2009, Some Comments on Bank Funding, Remarks to the 22nd Australasian Finance and Banking Conference, Sydney, December 16.
Battellino R., 2010, Aspects of Australia’s Finances, Address to Financial Executives International of Australia, Sydney, June 10.
Brown A., Davies M., Fabbro D. and Hanrick T., 2010,“Recent Developments in Banks’ Funding Costs and Lending Rates”, RBA Bulletin, March Quarter 2010.
Reserve Bank of Australia, Statistics on Banks Consolidated Group Capital, http://www.rba.gov.au/statistics/tables/index.html#assets_liabilities
Reserve Bank of New Zealand, 2009, Press Release, October 22.
Takats E. and Tumbarello P., 2009,“Australian Bank and corporate Sector Vulnerabilities––An International Perspective,” IMF Working Paper WP/09/223.
Tumbarello P. and Wang S., 2010,“What Drives Housing Prices in Australia? A Cross-Country Approach,” IMF Working Paper, forthcoming.
I wish to thank the Reserve Bank of Australia, the Australian Prudential Regulation Authority, and the Australian Treasury for their valuable comments on earlier drafts of this paper. I benefited greatly from comments and suggestions by Mike Moore, Ceyla Pazarbasioglu and Noel Sacasa. I also would like to thank Byung Kyoon Jang for his inputs. I am particularly grateful to Ray Brooks for the guidance and comments throughout the entire work. Kessia De Leo and Ranee Sirihorachai provided excellent editorial assistance. Moses Kitonga, Fernan Ramirez, and Mousa Shamouilian provided valuable research assistance. This paper is based on information available as of July 2010.
Shareholders’ capital includes paid-up ordinary shares plus a limited amount of non-innovative Tier 1 capital instruments (such as irredeemable preference shares on which dividends are noncumulative). It does not include retained earnings. Total regulatory capital is net of deductions such as future income tax benefits, intangible assets, investments in nonconsolidated subsidiaries, holdings of other banks’ capital instruments and other assets that are not eligible for inclusion in capital (Reserve Bank of Australia, Statistics on Banks Consolidated Group Capital, http://www.rba.gov.au/statistics/tables/index.html#assets_liabilities).
In 2006, APRA tightened its requirements on capital composition while taking a more conservative approach than other jurisdictions for the treatment of intangible assets for capital purposes (see J.F. Laker, The Australian Banking System Under Stress?, Australian Business Economists, Sydney, June 9, 2010).
For the details of the new measures see Basel Committee on Banking Supervision, Strengthening the Resilience of the Banking Sector, December 2009b, and Basel Committee on Banking Supervision, Press Releases of July 26 and September 12, 2010.
French banks for instance, show higher level of minorities than others.
P. Tumbarello and S. Wang, 2010, “What Drives Housing Prices in Australia? A Cross-Country Approach,” IMF Working Paper, forthcoming.
R. Battellino, Aspects of Australia’s Finances, Address to Financial Executives International of Australia, Sydney, June 10, 2010.
It is therefore a common banks’ practice to require LMI when the LTV is over 80 percent although exceptions might exist.
With a recourse loan the borrower is personally liable to repay a debt even if the funded asset (acquired with the loan proceeds) cannot be liquidated or the proceeds of its disposal are not enough to cover the loan amount. Hence, in case of a default, the lender can seize and sell the funded asset as well as the borrower’s unpledged assets or properties, whenever necessary.
See International Monetary Fund, “Australia: Basel II Implementation Assessment,” IMF Country Report No. 10/107, May 2010 for a more in-depth analysis and evidence of the sound supervisory system operated by APRA in implementing Basel II in Australia, which built on the robust regulatory and supervisory process already in place prior to Basel II. As part of it, it is worth recalling the history of stress testing in Australia, with the first exercise being carried out by APRA back in 2002/2003 (Laker, 2010).
It needs also to be noted that for the international comparison of short-term external debt data most of other countries, except New Zealand, report debt on an original maturity basis.
S. Black, A. Brassil and M. Hack, “Recent Trends in Australian Banks’ Bond Issuance,” RBA Bulletin, March Quarter 2010, show in fact that about 65 percent of bonds issued by Australian banks in 2007 and 2008 ($A 216 billion in the two years, the majority of which offshore) had a maturity at issuance of up to four years (with almost 40 percent maturity between two and four years. It is therefore likely that two to three years after the issue date the residual maturity of many of those bonds would be shorter than one year, putting them in the short-term debt bucket. A similar pattern would occur for bonds issued in the period 2005–07 with original maturities of four to six years as well as for those issued in 2009 with original maturities of two years.
Australian Prudential Regulation Authority, “APRA’s Prudential Approach to ADI Liquidity Risk,” Discussion Paper, September 11, 2009.
Basel Committee on Banking Supervision, International Framework for Liquidity Risk Measurement, Standards and Monitoring, December 2009a.
Basel Committee on Banking Supervision, Principles for Sound Liquidity Risk Management and Supervision, September 2008.
Reserve Bank of New Zealand, Press Release, October 22, 2009 and B.K. Jang, “New Zealand’s New Liquidity Policy: Will it Work as a Macroprudential Policy Tool?,” Unpublished, June, 2010.
Deposits with maturities longer than one year will benefit in fact with a more favorable treatment in the new framework for liquidity proposed by the Basel Committee.
See A. Brown, M. Davies, D. Fabbro and T. Hanrick, “Recent Developments in Banks’ Funding Costs and Lending Rates,” RBA Bulletin, March Quarter 2010 for a discussion on the increase of the cost of long-term funding.
Spreads between term deposit rates with longer maturities and government bond yields or banks’ bill rates of comparable maturities have become structurally positive after being negative before the crisis. While a similar trend is observed also for deposits with maturities shorter than one year, the magnitude of the change appears to be smaller, even controlling for changes in the yield curve, with the spread remaining negative with few limited exceptions. This would be consistent with banks’ showing a preference for longer maturities funding, preempting foreseeable prudential regulations. A fuller analysis of term deposits by maturity is however hampered by a lack of data, with no information available on the rates for the so-called term deposits specials.
Further refinements cannot however be excluded at this stage, particularly with the aim of reducing the distortions and cliff effects in the banks’ assets and liabilities maturity mix by introducing more granularity for the remaining terms of asset and liabilities within the one-year time horizon of the NFSR.
The funding gap could have however reached levels as high as 30 percent according to the BCBS December 2009 proposal.
Conservatively assuming income levels unchanged over the period considered.
The estimated impact of the new measure on banks’ income has reduced substantially from the original proposal, entailing much tighter calibration and substantially shorter period for the introduction of the rule (three years versus eight years). However, even considering a short introduction period of three years (as originally planned) the impact would be on average about 3 percent of post-tax annual income.