But tweaking the liquidity rules to make it easier for foreign banks to comply, APRA and the RBA have reduced the need for foreign banks to subcribe to a CLF, effectively sparing taxpayers from backstopping foreign banks. "Effectively the government, via the RBA, may end up providing guaranteed liquidity to a foreign-owned institution during a time of crisis that has little to do with Australia," said fixed income analyst Sean Keane of Triple-T Consulting.
It said that the financial industry watchdog would cut the amount of liquid assets that foreign banks were required to hold to withstand a run of customers withdrawing deposits in a so-called bank run, forcing them to hold enough assets to fund a 15-day run, rather than 30-day requirement for local banks.
Under new banking rules known as Basel III the banks are required to hold a large stockpile of high quality liquid assets, typically government bonds, that they can sell in a rush to finance a run on the bank when nervous depositors drain their cash.
APRA also extended the types of assets that foreign banks could help beyond the narrow definition that local banks are subjected to - namely Commonwealth and state government bonds.
With Australia‘s banking system much greater than the size of the outstanding government bonds, this meant it was impossible for the banks to hold the required amount of assets without cornering the whole market.
Foreign banks, APRA said, could also hold supranational and foreign government bonds, and paper and bonds issued by local banks.
But more interestingly, it means that the foreign banks will not have to subscribe the RBA and APRA’s Committed Liquidity Facility - the emergency line of credit that effectively allows banks to access short term financing should they require it.
Keane added that the RBA’s CLF could also be used as a cheap source of funds for foreign banks if their own funding lines tightened up. "There are various negative scenarios which could prove problematic for the RBA, and embarrassing for the Australian government.
Read more here: SMH