Banking (prudential standard) determination No. 2 of 2014
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority (APRA)
Banking Act 1959, section 11AF
Under subsection 11AF(1) of the Banking Act 1959 (the Act), APRA has the power to determine standards (prudential standards), in writing, in relation to prudential matters to be complied with by authorised deposit-taking institutions (ADIs) and authorised non-operating holding companies (authorised NOHCs). Under subsection 11AF(3) of the Act, APRA may, in writing, vary or revoke a prudential standard.
On 20 November, 2014, APRA made Banking (prudential standard) determination No. 2 of 2014 (the instrument) which revokes Prudential Standard APS 210 Liquidity made under Banking (prudential standard) determination No. 3 of 2013 and determines a new Prudential Standard APS 210 Liquidity (APS 210).
The instrument is to take effect on its date of registration on the Federal Register of Legislative Instruments.
- Background
APRA’s mandate is to ensure the safety and soundness of prudentially regulated financial institutions so that they can meet their financial promises to depositors, policyholders and fund members within a stable, efficient and competitive financial system. In response to the global financial crisis, the Basel Committee on Banking Supervision (Basel Committee) developed and released global liquidity measures for internationally active banks, known as Basel III liquidity. This prudential standard includes one of the two Basel Committee global liquidity standards, the Liquidity Coverage Ratio (LCR). It additionally incorporates the Principles for Sound Liquidity Risk Management and Supervision, which are qualitative liquidity risk management guidelines released by the Basel Committee in 2008.
2. Purpose and operation of the instrument
The purpose of the instrument is to revoke the existing APS 210 and to replace it with a new version of APS 210.
APS 210 provides for the introduction in Australia of the LCR, a key component of the Basel III liquidity reforms designed to improve the banking system’s resilience to periods of financial market stress. The LCR comes into force from 1 January 2015.
The new version of APS 210 introduces, as an interim measure, changes to the way the LCR is applied to Foreign ADIs. These changes are designed to overcome some of the challenges that would have arisen in the introduction of the LCR in relation to Foreign ADIs.
The revised arrangements continue to subject Foreign ADIs classified as LCR ADIs to a 30-calendar day liquidity requirement, as is standard for the LCR. However, they will only be required to meet a minimum holding of high quality liquid assets of 40 per cent. In meeting this requirement, Foreign ADIs will not be eligible to apply for a Committed Liquidity Facility (CLF) with the Reserve Bank of Australia (RBA).
The new version of APS 120 also includes changes to the definition of expected derivative cash inflows and cash outflows that may be shown on a net basis.
3. Consultation
APRA undertook consultation on the proposed amendments to APS 210 from September 2014 to October 2014. APRA’s formal public consultation package consisted of a letter to all ADIs dated 1 September 2014 and a draft prudential standard. In addition, APRA published a response to submissions to the September 2014 consultation on 4 November 2014.
4. Regulation Impact Statement
The Office of Best Practice Regulation has advised that a Regulation Impact Statement is not required.
5. Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
A Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 is provided at Attachment A to this Explanatory Statement.
Attachment A
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Banking (prudential standard) determination No. 2 of 2014
This Legislative Instrument is compatible with the human rights and freedoms
recognised or declared in the international instruments listed in section 3 of the
Human Rights (Parliamentary Scrutiny) Act 2011 (HRPS Act).
Overview of the Legislative Instrument
The instrument revokes Prudential Standard APS 210 Liquidity made under Banking (prudential standard) determination No. 3 of 2013 and determines a new Prudential Standard APS 210 Liquidity (APS 210). APS 210 aims to ensure that an ADI adopts prudent practices in managing its liquidity risks and maintains an adequate level of liquidity to meet its obligations as they fall due across a wide range of operating circumstances.
Human rights implications
APRA has assessed the instrument and is of the view that it does not engage any of
the applicable rights or freedoms recognised or declared in the international
instruments listed in section 3 of the HRPS Act. Accordingly, in APRA’s assessment,
the instrument is compatible with human rights.
Conclusion
This Legislative Instrument is compatible with human rights as it does not raise any
human rights issues.