Analysis: RBA’s TFF A Hero Again, This Time Its Target Is CLF
- Published on
- 11 Sep 2020, 03:42 PM
By Sophia Rodrigues
The Reserve Bank’s Committed Liquidity Facility is on the verge of a natural death thanks to its Term Funding Facility, sharp increase in Australian government securities and Semis, and rise in Exchange Settlement balances.
Significantly, its demise does not require regulators to compel banks to buy more government securities. Rather banks’ additional purchase of AGS and semis would be consistent with previously announced rules that require holdings in these securities to increase to 27% of outstanding stock in 2021.
In other words, because the increase in outstanding stock of these securities is expected to increase sharply, in absolute terms banks will be required to hold more of them.
Interestingly, the very options once considered by the RBA to deal with shortage of liquid assets in Australia before CLF was implemented, are now replacing the CLF.
CLF RBA Facility But Determined By APRA
A key point to remember is CLF is a facility provided by the RBA to meet Australian Prudential Regulation Authority’s liquidity regulations for banks under Basel 3.
While the facility is provided by the RBA, the amount itself is decided by APRA based on application by banks which contains among other things, their estimate of net cash outflows.
The RBA’s role is to provide a projection of ABS and Semis, and based on that calculate the amount that banks can reasonably hold. The RBA has already determined the proportion (27% for 2021) but will estimate the total stock only after the budget is announced.
In arriving at the CLF, APRA considers banks’ “reasonable” holdings of AGS and Semis, but this year it will also need to account for other alternative liquid assets. These are ES balances and the unutilized portion of the banks’ TFF.
In the 2021 year, the total net cash outflows of banks are expected to rise because of increase in bank deposits. But total eligible liquid assets counting towards LCR are expected to rise sharply, leaving little or no requirement for the CLF.
ES BALANCES TOP QUALITY LIQUID ASSET
The surplus ES balances with the RBA stood at A$48 billion on September 10, and it is expected that a majority of these belong to the 15 institutions that are required to maintain LCR.
As banks draw down on their TFF allowance, ES balances will go up, pushing it up further. ES balances are also expected to go up as RBA conducts more bond-buying. All this would count towards liquid assets for LCR purposes.
It is worth noting the utilized portion of TFF when turned into ES balances becomes liquid assets of the highest kind.
The unutilized balances on TFF would also count towards liquid assets. As of Friday, banks have around A$93 billion of undrawn TFF balances. There is a further A$57 billion of supplementary funding allowance but it is unclear if APRA will take this into account.
The tricky part for APRA is to estimate ES balances and unutilized TFF to arrive at the CLF amount for 2021. It is expected that APRA would be conservative with its estimate given TFF allowances could go down, and that would mean there may be a small CLF amount for 2021.
An interesting background to this is before CLF was implemented, the RBA considered two options to meet banks’ liquidity needs.
One was to increase size of ES balances but that would have required a considerable increase in its balance sheet, and a determination by RBA on what assets it would be willing to hold against increase in its liabilities.
Another option was for government to increase its debt issuance substantially with the sole purpose of providing a liquid asset for the banking system to hold. But that would have been a perverse outcome as liquidity standard would be dictating the government’s debt strategy.
CLF was born because those options were not feasible.
They are a reality now, and hence it may be time for CLF to fade.