RBA Kohler: Banks Likely To Increase HQLA Holdings, Increase Bond Issuance

By Sophia Rodrigues

(Sydney, November 23, 2021)—Banks are likely to increase their holdings of High Quality Liquid Assets (HQLA) and fund it in part by increased bond issuance given the phasing out of the Committed Liquidity Facility (CLF), a Reserve Bank of Australia official said Tuesday.

The RBA’s head of domestic markets department Marion Kohler made the comments in a speech to the Australian Securitisation Forum.

Banks might decrease their holdings of bank bonds and RMBS, given the changes in the CLF, Kohler said.

“At the same time, banks are likely to increase their holdings of HQLA, which could be funded in part by increased bond issuance.”

This is one of the three key areas the RBA will be keeping an eye on over the coming months and years.

The others are risk premiums and the refinancing of the Term Funding Facility by banks.

According to Kohler, while the current bank bond spreads are around their lowest level in over a decade, it’s difficult to know whether it is not aligned with fundamentals. On the other hand, she expressed confidence that risk premiums on equity remain within their typical range.

Kohler said it is important to closely monitor risk premiums because the search for yield amid historically very low interest rates has the potential for investors to bid up the price of risky assets to the extent that risk may no longer be adequately priced.

On TFF, Kohler noted that the maturities are large and concentrated in the September 2023 and June 2024 quarters.

But banks have indicated to the RBA that they banks to issue bonds earlier than, or pre-fund scheduled TFF maturities. They also have an option of repaying TFF funding early without incurring any penalty.

“These strategies would allow banks to spread the refinancing task over a period of time, and would serve to reduce the effect of refinancing on market conditions,” Kohler said.

If banks waited to replace TFF drawdowns in the quarter of maturity, it would require quarterly issuance as a share of assets at levels not seen in over a decade, she pointed out.

--Contact: Sophia@centralbankintel.com