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Connexus : Issue 36
Defining HQLA The prudential standard APS 210 defines liquid assets only under the MLH regime (which applies to all mutuals). Larger ADIs have no such guidance for stress testing. This will change under the new framework, with large 'scenario' ADIs subject to a new, narrower 'HQLA' definition that effectively restricts such assets to cash, balances held with the Reserve Bank, and federal government and semi-government securities. By contrast, the MLH regime allows holdings of any Reserve Bank repo- eligible security, investment-grade bank bills and certificates of deposit issued by ADIs and any deposits readily convertible into cash. The issue is whether mutual ADIs will see a tightening of the MLH liquid asset definition. APRA has acknowledged that the MLH regime provided a sufficient degree of resilience during the financial crisis, but has confirmed to Abacus that it will potentially update some aspects of the regime. One example is how APRA sees repo- eligible securities. It is becoming clearer that, just because a security is repo- eligible, it doesn't mean it will qualify as a liquid asset. You must have a facility with the RBA that allows you to convert the security to cash within 48 hours during a stressed situation. If not, there must be an alternative mechanism that is guaranteed to achieve the same outcome. Flow-on effects The new framework will undoubtedly bring significant shifts in asset concentrations held by the major banks as they relinquish stock no longer deemed as HQLA and shift their holdings to a narrower band of asset classes. What remains to be seen is the impact this will have on the availability and price of those assets and how this will affect mutual ADIs, which should expect, in theory, to see minimal change to their operating environment. Such a notion was effectively given a test run when APRA moved on December 14 to enforce its position on the treatment of term deposits when determining liquid asset positions. APRA said it would no longer accept a 'letter of comfort' issued to a depositing ADI (such as a mutual), saying that a term deposit was at call, unless there was a contractual ability for the depositor to withdraw funds within two business days. While APRA's position was correct, many mutuals have now found themselves looking elsewhere for other liquid assets, only to find a price difference of up to 20-30bp -- most evident with negotiable certificates of deposit the major banks issued. The invisible line According to APRA, there are no credit unions or building societies that are required to conduct regular stress tests and scenario analysis. APRA continues to maintain that it is not about to shift any mutuals into the rigorous regime of stress testing and scenario analysis -- it's as much about the complexity of your business as it is about size. However, going forward, we may see greater than normal expectations from APRA supervisors, if not already. This creates significant uncertainty among those mutual ADIs that sit near the 'invisible line', particularly given there are no explicit transitional arrangements that would show an ADI how it would be moved from one regime to another (should this ever occur) and in what timeframe. When it comes to compliance and complexity, there is a huge gap between the two regimes. -- Daniel Newlan is senior adviser, policy and public affairs, Abacus. REGULATION connexus www.abacus.org.au 18 Just because a security is repo-eligible, it doesn't mean it will qualify as a liquid asset. When it comes to compliance and complexity, there is a huge gap between the two regimes.