Banking (prudential standard) determination No. 3 of 2025
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 13 April 2025, APRA made Banking (prudential standard) determination No. 3 of 2025 (the instrument), which revokes Prudential Standard APS 210 Liquidity made under Banking (prudential standard) determination No. 13 of 2022 and determines a new Prudential Standard APS 210 Liquidity (APS 210).
The instrument commences on 1 July 2025.
1. 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.
APRA carries out this mandate through a multi-layered prudential framework that encompasses licensing and supervision of institutions. In the case of the banking industry, APRA is empowered under the Act to issue legally binding prudential standards that set out specific prudential requirements with which ADIs must comply.
APRA regularly reviews its regulatory regime and amends its prudential requirements as a result of a number of factors, including:
- international developments;
- changes in financial market conditions or changes in risk management practices, in response to identified weaknesses in the prudential framework; and
- to reduce potential negative impacts of emerging industry issues.
APS 210 is a key standard in APRA’s prudential framework that provides detailed liquidity risk specific requirements for ADIs.
As Australia is a member of the Basel Committee on Banking Supervision (BCBS) and the Group of 20, Australia and APRA are committed to meeting internationally agreed standards for prudential regulation for ADIs by implementing standards that are based on the framework agreed by the BCBS. APS 210 follows closely the BCBS’s liquidity framework, with appropriate Australian adjustments.
2. Purpose and operation of the instrument
The purpose of the instrument is to revoke the existing APS 210 and replace it with a new version of APS 210.
APS 210 requires ADIs to have stable funding and manage their liquidity risks, including maintaining enough liquidity to meet their obligations as they fall due across a wide range of operating circumstances. The new APS 210 incorporates amendments resulting from APRA’s targeted changes to strengthen liquidity and capital requirements for ADIs, specifically policy changes on market valuations for liquid assets, and improved processes for requesting exceptional liquidity assistance (ELA) with the Reserve Bank of Australia.[1]
Details of the new prudential standard
See Attachment A.
Documents incorporated by reference
Under paragraph 14(1)(a) of the Legislation Act 2003, the standard incorporates by reference as in force from time to time:
- Acts of Parliament and associated delegated laws; and
- Prudential Standards determined by APRA under subsection 11AF(1) of the Act.
These documents may be freely obtained on the Federal Register of Legislation at www.legislation.gov.au.
Under paragraph 14(1)(b) of the Legislation Act 2003, APS 210 incorporates by reference the Basel III leverage ratio framework and disclosure requirements as set out by the Basel Committee on Banking Supervision in its Basel III leverage ratio framework and disclosure requirements as it exists at 12 January 2014. This document is available at http://www.bis.org/publ/bcbs270.htm.
Exercise of discretion by APRA
Under subsection 11AF(2) of the Act, a prudential standard may provide for APRA to exercise powers and discretions under the standard, including (but not limited to) discretions to approve, impose, adjust or exclude specific prudential requirements in relation to one or more specified ADIs or authorised NOHCs.
APRA’s prudential standards include powers that may be exercised by APRA that involve an element of discretion and that may affect the interests of the ADIs to which the prudential standards apply. These powers include a power to adjust or exclude a provision of the prudential standard.
The need to apply discretion is driven by entity-specific issues and circumstances that are not adequately addressed by the generally applicable provisions of the prudential standards. For example, adjustment or exclusion of a provision may be necessary to obtain a better prudential outcome than would be the case if the prudential requirement were applied unaltered to a particular regulated entity.
When exercising its discretion, APRA considers a wide range of factors, including the considerations set out in the Act and the Australian Prudential Regulation Authority Act 1998.
The exercise of APRA's powers is governed by a robust decision-making framework which is documented in APRA's internal policies. This framework supports APRA in fulfilling its mandate by limiting decision making to those senior APRA officers with the appropriate experience and skill to exercise prudent judgement. The framework also requires decision makers to seek advice from internal technical experts.
The power is also exercised following discussion with the relevant ADI about its appropriateness and the impact it may have on the entity.
Review of decisions
Decisions made by APRA exercising powers in prudential standards are not themselves subject to merits review. This is because these decisions are preliminary decisions that may facilitate or lead to substantive decisions which are subject to merits review.
A breach of a prudential standard is a breach of the Act, as section 11AG of the Act provides that ADIs must comply with applicable prudential standards. However, there are no penalties prescribed for such breaches. Instead, an ADI’s breach of a provision in the Act is grounds for APRA to make further, substantive decisions under the Act in relation to the ADI. Those decisions are:
- to revoke an authority to carry on banking business (section 9A of the Act); and
- to issue a direction to the ADI, including a direction to comply with the whole or part of a prudential standard (section 11CA of the Act).
It is only at this stage that an ADI is exposed to a penalty: loss of its authority under section 9A or 50 penalty units if it breaches the direction (section 11CG of the Act). In nearly all cases[2] the decision is preceded by a full consultation with the ADI to raise any concerns it may have in relation to the decision.
A decision of APRA to impose a direction is subject to merits review under section 11CA of the Act, which is appropriately available at the point where an ADI could be exposed to a penalty.
A decision of APRA to revoke an authority under the Act is subject to merits review, unless either:
- APRA has determined that access to natural justice and merits review is contrary to the national interest or contrary to the interests of depositors with the ADI; or
- the authority is an authority that is to cease to have effect on a day specified in the authority (section 9A(8) of the Act).
3. Consultation
In November 2023, APRA released proposed targeted changes to liquidity and capital requirements for consultation.[3] The changes primarily affect smaller ADIs on the Minimum Liquidity Holdings (MLH) regime and aim to strengthen the banking sector’s resilience to future stress.
APRA’s proposed changes aimed to strengthen ADIs’ resilience in three ways: by ensuring that ADIs on the MLH regime value liquid assets at their market value, ensuring ADIs have robust processes for requesting exceptional liquidity assistance (ELA), and strengthening the composition of liquid assets. This followed lessons learned from the US and European banking crises in early 2023.
The consultation closed on 16 February 2024, with 35 submissions provided by industry. APRA also held numerous workshops and discussions with industry bodies and with entities. Industry provided a range of feedback, though the headline concern was the profitability impact of APRA’s proposal regarding the composition of liquid assets. Industry generally supported the other two proposals.
In July 2024, APRA issued a response paper that set out APRA’s response to submissions, including the final APS 210. This outlined that APRA would:
- proceed with the proposed policy changes on market valuations for liquid assets;
- proceed with the proposed improved processes for ELA; and
- defer policy changes to APS 210 regarding the composition of liquid assets to APRA’s planned broader review of liquidity risk, to allow a more holistic review of the MLH regime.
To support the smooth implementation of the first two changes, APRA deferred commencement by six months to 1 July 2025, as suggested by some industry participants. APRA also provided several technical clarifications.
APRA is satisfied the consultation was appropriate and reasonably practicable.
4. Impact Analysis
The Office of Impact Assessment (OIA) confirmed a Regulatory Impact Statement was 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 B to this Explanatory Statement.
ATTACHMENT A
Details of the new prudential standard
Authority, application, commencement and interpretation
Under subsection 11AF(1) of the Act, APRA may determine prudential standards to be complied with by (among others) all, or specified classes of, ADIs and authorised NOHCs.
Paragraphs 1 to 9 are the machinery provisions relating to the legal authority under which the instrument is made, the classes of ADIs and authorised NOHCs that are required to comply with the standard, and the commencement date and interpretation of the standard.
Paragraph 5 includes a provision allowing an ADI, or a member of its Level 2 group, that is an originating ADI in a securitisation that meets operational requirements for regulatory capital relief (under Prudential Standard APS 120 Securitisation) to exclude certain assets and liabilities of special purpose vehicles from minimum liquidity holdings (MLH) and net stable funding ratio (NSFR) calculations.
Paragraph 7 notes that terms that are defined in Prudential Standard CPS 001 Defined terms appear in bold the first time they are used in APS 210. Paragraph 8 notes that where APS 210 provides for APRA to exercise a power or discretion, it must be exercised in writing. Paragraph 9 notes that a reference to an Act, Regulations, or Prudential Standard in APS 210 is a reference to the instrument as in force from time to time.
Definitions
Paragraph 10 is a machinery provision setting out relevant definitions for an associated entity and a financial institution.
Key principles
Paragraphs 11 to 14 describe key liquidity principles for an ADI, including an ADI’s responsibility for sound management of its liquidity risk and having a robust framework to manage liquidity risk. ADIs must also, at all times, maintain sufficient liquidity to meet obligations as they are due, and hold minimum levels of liquid assets to survive a severe liquidity stress. On an ongoing basis an ADI needs to ensure its activities are funded with stable sources of funding.
Paragraph 14 relates to notification requirements – it requires an ADI to notify APRA as soon as possible of any concerns on its current or future liquidity position, and plans to address the concerns, as well as immediate notification if there is severe liquidity stress and action being taken to address the situation.
Board and senior management responsibilities
Paragraph 15 states that an ADI’s Board is ultimately responsible for sound and prudent management of the ADI’s liquidity risk and sets out the requirement for an ADI to maintain a liquidity risk management framework commensurate with the level and extent of liquidity risk that the ADI is exposed to. For a foreign ADI, the senior officer outside Australia has the responsibilities of the Board described in APS 210.
Paragraph 16 outlines minimum requirements in the liquidity risk management framework, including in relation to a liquidity risk tolerance statement, Board approved liquidity management strategy and policy, operating standards for identifying, measuring, monitoring and controlling liquidity risk in line with tolerance, Board approved funding strategy, and contingency funding plan.
Paragraph 17 requires the Board to ensure senior management and other relevant personnel have necessary experience to manage liquidity risk, and that the ADI’s liquidity risk management framework and practices are documented and reviewed annually at a minimum.
Paragraph 18 requires the Board to review regular reports on the ADI’s liquidity position and information on new or emerging liquidity risks where necessary.
Paragraph 19 outlines minimum requirements for senior management, including developing a liquidity management strategy, policies and processes aligned with the ADI’s liquidity tolerance; ensuring sufficient liquidity is maintained at all times; determining and clearly outlining in policies the structure, responsibilities and controls for managing liquidity risk and overseeing liquidity positions of legal entities, branches and subsidiaries; ensuring adequate internal controls; ensuring the effectiveness and appropriateness of stress tests, contingency funding plans and liquid asset holdings for the ADI; developing reporting criteria; establishing procedures and approvals for exceptions including escalation processes and follow-up for limit breaches; monitoring current trends and market developments closely so the liquidity management strategy can be changed as needed; and reviewing information on liquidity developments continuously and regularly reporting to the Board.
Paragraph 20 notes that senior management and the Board need to exhibit a thorough understanding of the links between market liquidity risk and the risk that an ADI may not meet its financial obligations (and other risks such as credit, market, operational and reputation risks), and how they affect the ADI’s overall liquidity risk management strategy.
Liquidity risk management framework
Paragraphs 21 to 24 outline requirements relating to the liquidity risk tolerance of an ADI. An ADI’s liquidity risk tolerance needs to be documented, reviewed at least annually, and articulated in a way that clearly states the trade-off between risks and profits. The Board and senior management need to ensure the risk tolerance allows the ADI’s liquidity position to be effectively managed so that it is able to withstand a prolonged period of stress.
Paragraphs 25 and 27 relate to what must be included in an ADI’s liquidity risk management framework, such as the organisational structure as it relates to liquidity at Level 1 and 2 and the responsibilities and roles involved in managing liquidity risk. The liquidity risk management framework must also be developed to ensure that sufficient liquidity is maintained, including a cushion of unencumbered liquid assets to withstand a range of stress events, and well-integrated into the ADI’s overall risk management process.
Paragraph 28 outlines the need for the ADI’s liquidity risk management oversight function to be operationally independent and staffed with personnel with skills and authority to challenge the ADI’s treasury and other liquidity risk management businesses.
Paragraphs 29 to 31 cover requirements on the liquidity management strategy, including specific policies needed, that it must account for liquidity needs under normal as well as stress conditions, and quantitative and qualitative targets. It includes requirements on how the strategy is formulated – in terms of appropriateness for the ADI’s nature, scale and complexity, legal structure, key business lines, breadth and diversity of markets, products and jurisdictions.
Paragraphs 32 to 34 focus on awareness throughout the ADI of the liquidity management strategy and liquidity concerns. Paragraph 32 notes that senior management are required to communicate throughout the ADI the liquidity management strategy, key policies for implementing the strategy, and the liquidity risk management structure. Paragraph 33 notes that the ADI must have adequate policies, procedures and controls to ensure the Board and senior management are informed immediately of new and emerging liquidity concerns. Under paragraph 34, all business units conducting activities with an impact on liquidity are to be made fully aware, to the satisfaction of senior management, of the liquidity management strategy and operate in line with policies, procedures, limits and controls.
Paragraph 35 details that the liquidity risk management framework needs to be subject to ongoing effective review, along with a comprehensive review as part of the review of the risk management framework under Prudential Standard CPS 220 Risk Management.
Management of liquidity risk
Paragraphs 36 to 43 include requirements for an ADI’s management of liquidity risk. This covers the need for a sound process in the management of liquidity risk, limits, management of collateral, early warning indicators, management information systems, management of intraday liquidity positions, a cost and benefits allocation process for funding and liquidity, and what ADIs must do if they are active in multiple currencies.
Funding strategy
Paragraphs 44 to 46 provide details on the funding strategy of an ADI. ADIs are required to have a three-year funding strategy that is documented and provided to APRA on request. The funding strategy needs to be reviewed and Board-approved at least annually, and supported by robust assumptions that align with the liquidity management strategy and business objectives of the ADI. The funding strategy also needs to be reviewed and updated at least annually for changed funding conditions or changes in the strategy of the ADI, at a minimum. An ADI needs to maintain an ongoing presence in its chosen funding markets and strong relationships with funds providers, as well as regularly gauge its capacity to raise funds quickly (including identifying the main factors that affect its ability to raise funds and monitoring these factors).
Contingency funding plan
Paragraphs 47 to 51 describe requirements relating to a formal contingency funding plan that an ADI must have in place, including what the plan should cover, the design and scope of the plan, the frequency of review and testing, and approval by the Board.
Classification of ADIs
Paragraphs 52 to 54 explain the classification of ADIs for the purpose of APS 210. An ADI must meet minimum quantitative requirements continuously based on its classification (aside from financial stress situations). An ADI that is a locally incorporated ADI will be determined by APRA as either a Liquidity Coverage Ratio ADI (LCR ADI) or a Minimum Liquidity Holdings ADI (MLH ADI). A foreign ADI is an LCR ADI unless APRA determines it is an MLH ADI, and will have regard to the ADI’s size and complexity in relation to liquidity risk.
Liquidity coverage ratio ADIs
Paragraphs 55 and 56 cover the requirements for an LCR ADI to maintain an adequate level of unencumbered high-quality liquid assets (HQLA) to meet its liquidity needs over a 30-calendar day period under a severe stress scenario (see Attachment A). Where there is no financial stress situation, for a locally incorporated ADI the value of each of the AUD LCR and all currencies LCR must not be less than 100 per cent, and for a foreign ADI, the value of the LCR on an all-currencies basis must not be less than 40 per cent. APRA may require an LCR ADI to maintain a higher minimum LCR if APRA has concerns about the ADI’s liquidity risk profile or the quality of its liquidity risk management.
Minimum liquidity holdings ADIs
Paragraphs 57 and 58 cover the requirements for an MLH ADI to maintain a minimum holding of nine percent of its liabilities in specified liquid assets (in line with Attachment B). Higher minimum liquidity holdings may be required by APRA where it has concerns on the ADI’s liquidity risk profile or the quality of its liquidity risk management.
Net stable funding ratio
Paragraphs 59 to 61 detail that a locally incorporated ADI that is an LCR ADI must meet NSFR requirements in APS 210, including maintaining an NSFR of at least 100 per cent at all times. APRA can also require a higher minimum NSFR to be maintained if it considers it appropriate, including if there are concerns about the ADI’s funding or liquidity risk profile or the quality of its liquidity risk management.
Stress testing
Paragraphs 62 to 66 detail additional requirements for an LCR ADI in relation to stress testing, including the need for an LCR ADI to conduct stress tests regularly for a range of stress scenarios to determine sources of potential liquidity strain and ensure alignment with the ADI’s liquidity risk tolerance. LCR ADIs need to use the outcomes of stress tests to adjust their liquidity management strategy, policies and positions and to develop effective contingency plans to deal with liquidity stress events. The requirements also cover how stress tests should help an LCR ADI analyse impacts on its liquidity positions, integrate results into strategic planning and risk management processes, including in setting internal limits and documentation, review, and reporting requirements with the Board and APRA.
Local operational capacity
Paragraphs 67 to 69 relate to requirements for a foreign ADI. Annually, foreign ADIs need to perform an assessment of their local operational capacity (LOC) to liquidate assets and make or receive payments without assistance from outside Australia; results need to be provided to APRA on request. At a minimum the LOC assessment must include a scenario with a combination of times zones, different public holidays and an offshore operational risk event in which the foreign ADI would operate. Additional requirements may be imposed by APRA if the LOC assessment reveals issues concerning the foreign ADI’s ability to liquidate assets and make or receive payments without assistance from staff outside Australia.
Exceptional Liquidity Assistance
Paragraph 70 details notification and information requirements for an ADI under severe liquidity stress to request ELA from the RBA. An ADI must notify APRA immediately of liquidity concerns and its intention to request ELA prior to approach the RBA. An ADI must have the operational capability to provide any information requested by APRA or the RBA along with its ELA application or within other timeframes that APRA specifies.
Adjustments and exclusions
Paragraph 71 relies on subsection 11AF(2) of the Act and provides for APRA to adjust or exclude a specific requirement in APS 210 in relation to one or more specified ADIs or authorised NOHCs.
Previous exercise of discretion
Paragraph 72 requires an ADI to contact APRA if it is seeking to rely on a previous exercise of discretion by APRA under a previous version of APS 210.
Attachment A – Liquidity coverage ratio
Attachment A to APS 210 sets out requirements on the liquidity coverage ratio (LCR) which aims to ensure that an ADI maintains an adequate level of unencumbered HQLA that can be converted into cash to meet its liquidity needs over a 30-calendar day horizon under a severe liquidity stress scenario.
Attachment A to APS 210 includes details on the two components of the LCR - the stock of HQLA, and total net cash outflows over the next 30 calendar days. The eligible stock of HQLA is split into:
- the highest-quality liquid assets (HQLA1) which can be included without limit at market value (and are not subject to a haircut under the LCR); and
- other high-quality liquid assets (HQLA2) which can only comprise up to 40 per cent of total HQLA. HQLA 2 includes HQLA 2A (a 15 per cent haircut is applied to the market value) and HQLA 2B (haircuts vary from 25 per cent for residential mortgage-backed securities satisfying certain criteria, to 50 per cent for corporate debt securities and common equity shares that satisfy certain criteria). HQLA 2B must not exceed 15 per cent of the total stock of HQLA.
Assets included in both categories of the stock of HQLA are those held on the first day of the stress period, irrespective of their residual maturity.
Attachment A to APS 210 covers the use of alternative liquidity asset treatment for LCR ADIs, and operational requirements that all assets in the stock of eligible HQLA are subject to.
Attachment A to APS 210 provides details on how ADIs are to determine total net cash outflows. Total net cash outflows are calculated as total expected cash outflows minus total expected cash inflows in a specified stress scenario for the subsequent 30 calendar days.
Attachment A to APS 210 includes definitions and how ADIs are to determine the components of cash outflows, including retail deposit outflows, fixed-term deposits, unsecured wholesale funding outflows, operational deposits, and liquidity facilities.
Attachment A to APS 210 provides details on how ADIs are to determine their available cash inflows. Only contractual inflows from outstanding exposures that are fully performing and for which ADIs have no reason to expect a default within the 30-day time horizon are to be included in cash inflows. Attachment A to APS 210 includes details on cash inflows for secured lending (including reverse repos and securities borrowing), lines of credit, and inflows by counterparty (retail and SME, other wholesale, operational deposits, other cash inflows).
Attachment B – Minimum liquidity holdings approach
Attachment B to APS 210 sets out the requirements for MLH ADIs, including what is included as liabilities (total on-balance sheet liabilities and irrevocable commitments), and liquid assets (which must be included at market value and free from encumbrances), except where approved for a prudential purpose by APRA. An MLH ADI needs to set a trigger ratio above its MLH requirement and ensure that liquidity is managed in line with its trigger ratio. An MLH ADI must inform APRA immediately when it becomes aware that its liquid assets may fall below its MLH requirement, including of remedial action taken or planned to restore its liquidity position.
Attachment C – Net stable funding ratio
Attachment C to APS 210 sets out the requirements for the NSFR which aims to reduce the funding risk of an ADI over a one-year time horizon. An ADI needs to fund its activities with sufficiently stable sources of funding to mitigate the risk of future funding stress. The NSFR is calculated by dividing two components - available stable funding (ASF) divided by required stable funding (RSF). An ADI needs to maintain an appropriate buffer above its NSFR in line with its liquidity risk tolerance.
Attachment C to APS 210 provides details on how to calculate an ADI’s ASF - the portion of capital and liabilities expected to be reliably provided over a one-year time horizon. The ASF is measured based on the broad characteristics of the relative stability of an ADI’s funding sources (including the contractual maturity of its liabilities and the differences in likelihood of different funding providers to withdraw their funds). Attachment C details the liabilities which are to receive varying ASF factors (100, 95, 90, 50, or 0 per cent).
Attachment C to APS 210 provides details on how to calculate an ADI’s RSF – the minimum amount of stable funding an ADI is required to hold, which is a function of the liquidity characteristics and residual maturities of the various assets held by an ADI (including off-balance sheet exposures). Attachment C details the assets which are to be assigned varying RSF factors (0, 5, 10, 15, 50, 65, 85 and 100 per cent).
ATTACHMENT B
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 3 of 2025
The 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 purpose of the legislative instrument is to revoke Prudential Standard APS 210 Liquidity and replace it with a new version of APS 210.
APS 210 sets out the requirements for authorised deposit-taking institutions (ADIs) to have stable funding and manage their liquidity risks, including maintaining enough liquidity to meet their obligations as they fall due across a wide range of operating circumstances. ADIs are bodies corporate that have been granted the authority, under the Banking Act 1959, to carry on banking business in Australia.
Human rights implications
APRA has assessed the legislative 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 legislative instrument is compatible with human rights.
Conclusion
The legislative instrument is compatible with human rights as it does not raise any human rights issues.
[1] Refer to ‘APRA finalises targeted changes to strengthen banks’ liquidity and capital requirements’ dated 24 July 2024 and available on APRA’s website.
[2] Subsection 9A(4) of the Act specifically provides that APRA does not need to consult where APRA is satisfied that doing so could result in a delay in revocation that would be:
- contrary to the national interest; or
- contrary to the interests of depositors with the ADI.
[3] APRA letter ‘Targeted changes to ADI liquidity and capital standards’ dated 15 November 2023 and available on APRA’s website at: https://www.apra.gov.au/targeted-changes-to-adi-liquidity-and-capital-standards.