APRA finalises targeted changes to strengthen banks’ liquidity and capital requirements

The Australian Prudential Regulation Authority (APRA) has finalised targeted reforms to banks’ liquidity and capital requirements designed to strengthen the ability of banks to respond to a future stress event.

APRA consulted on changes to liquidity arrangements in November last year in response to lessons learned from the United States and European banking crisis of March 2023. 

APRA received 35 submissions from entities, individuals and industry bodies during the formal three-month consultation period. Given the potential impact of the proposals on some banks, APRA enhanced its usual policy process with additional workshops and discussions with industry stakeholders. 

APRA has today released a response paper confirming plans to proceed as planned with two of the three proposed reforms:

• Banks subject to the Minimum Liquidity Holdings (MLH) regime for calculating their liquidity requirements will be required to adjust the value of their liquid assets regularly for movements in market prices; and
• All banks must be operationally ready to provide certain key information regarding their financial position when requesting exceptional liquidity assistance (ELA) from the Reserve Bank of Australia.

These two measures will come into effect from 1 July 2025.

However, APRA will defer consideration of a proposal to phase-out bank debt securities¹ as liquid assets for MLH banks until APRA’s planned broader review of liquidity risk, which is due to commence next year. This approach will allow a more holistic review of the MLH regime.

In the meantime, APRA expects MLH banks to take steps to improve the diversification of their liquidity portfolios in line with APRA’s existing requirements and guidance. This should be reflected in banks’ usual annual review of liquid assets under Prudential Standard APS 210 Liquidity (APS 210). APRA requests these annual reviews be provided to APRA when approved by the board and by no later than 1 July 2025. Banks with material concentrations of bank debt securities should expect heightened supervisory attention consistent with APRA’s existing supervisory framework. 

APRA Member Therese McCarthy Hockey said APRA had sought to strike the appropriate balance between financial safety and other considerations including competition and efficiency.

“Australia’s many small banks provide valuable services to communities across Australia, but to keep doing so into the future, they must remain financially resilient. The changes to liquidity requirements we have announced today will put these banks in a better position to withstand the types of liquidity shortfalls that saw multiple overseas banks fail or need rescuing last year. 

“In deferring changes to APRA’s liquidity standard to the broader review, we have the opportunity to engage further with industry concerns and consider a wider range of options to promote liquidity resilience.”

The response paper, as well as final versions of the updated APS 210 and Prudential Practice Guide APG 210 Liquidity are available at: Proposed changes to liquidity and capital requirements for authorised deposit-taking institutions | APRA.

For more information on liquidity in banking, see: APRA Explains: Liquidity in banking | APRA.