Committed Liquidity Facility

The Committed Liquidity Facility was fully phased-out to zero as at 1 January 2023. For any questions related to this facility, contact the Domestic Market Operations desk.

Since January 2015, those ADIs to which APRA applies the Basel III liquidity standards have been required to hold high-quality liquid assets (HQLA) sufficient to withstand a 30-day period of stress under the liquidity coverage ratio (LCR) requirement.

In the Australian dollar securities market, only Australian Government Securities (AGS) and securities issued by the borrowing authorities of the states and territories (semis) have been assessed by APRA as meeting the Basel criteria for HQLA.[1] Historically, a large proportion of the current stock of AGS and semis (HQLA securities) on issue has been held by non-residents, and ADIs' holdings have been well below the amount that would be needed if all ADIs were to meet their LCR requirement through this means (Table 1). Historically, the supply of AGS and semis has not been sufficient for banks to meet the LCR requirement. In 2015, banks would have had to hold around two-thirds of the value of all AGS and semis outstanding to meet LCR requirements. Compelling ADIs to acquire most of the stock of HQLA securities would very likely interfere with the properties of the market that qualified it as HQLA in the first place; namely, its depth and liquidity.

Table 1: Holdings of HQLA Securities by Domestically Incorporated LCR ADIs and Non-residents
  HQLA securities(a)
$A billion 		Share of HQLA securities held by domestically incorporated LCR ADIs
Per cent 		Share of HQLA securities held by non-residents
Per cent
31 Dec 2014 682 22 49
31 Dec 2015 726 24 48
31 Dec 2016 784 26 44
31 Dec 2017 837 24 46
31 Dec 2018 875 23 46
31 Dec 2019 962 23 46
31 Dec 2020 1323 25 42
31 Dec 2021 1361 18 38

(a) Market value of Australian dollar denominated AGS and semis; does not include debt securities of EFIC

Sources: ABS; RBA

Apart from AGS and semis, the only other significant assets recognised as HQLA are liabilities of the Reserve Bank; namely, banknotes and ES balances. The Basel III standards allow jurisdictions to use an alternative treatment for holdings in the stock of HQLA when there is insufficient supply of HQLA. The Committed Liquidity Facility (CLF) was the Reserve Bank and APRA's alternative treatment and, under this arrangement, certain ADIs were able to use a contractual liquidity commitment from the Reserve Bank towards meeting their LCR. The Reserve Bank's CLF was approved by the Reserve Bank Board in November 2010 and announced via media release in the subsequent month. Any drawdown on the CLF was required to meet certain conditions, including that APRA did not object to the drawdown and the RBA assessed that the ADI had positive net worth. Accordingly, the potential funding under the CLF was disclosed as a contingent liability in the Reserve Bank's Annual Report. (See the CLF Operational Notes for further details on the facility.)

The aggregate size of the CLF in each year was the difference between APRA's assessment of the overall LCR requirements of locally-incorporated ADIs and the Reserve Bank's assessment of the amount of AGS and semis that could reasonably be held by these ADIs without unduly affecting market functioning (Table 2). For 2015–2019, the Reserve Bank assessed that ADIs could reasonably hold 25 per cent of the stock of HQLA securities. Over recent years, the volume of HQLA securities has risen and they have become more readily available in bond and repo markets. In particular, since 2019, the stock of AGS and semis outstanding has risen substantially as the Australian, state and territory governments issued bonds to finance the fiscal response to the economic effects of the COVID-19 pandemic. Given this, the Reserve Bank assessed that the ADIs could increase their holdings to 27 per cent of the stock in 2020, 30 per cent of the stock in 2021 and 35 per cent of the stock in 2022.[2]

Based on the Reserve Bank's projections of ES balances and APRA's projections of LCR requirements, APRA and the RBA consider there to be sufficient HQLA for locally incorporated LCR ADIs to meet LCR requirements now and for some time without the need to utilise the CLF. Accordingly, on 1 January 2023 the CLF was fully phased-out to zero.[3]

Table 2: Reasonable Holdings of HQLA Securities and the Committed Liquidity Facility
$A billion
  Projection of HQLA securities outstanding(a) Locally incorporated LCR ADIs
Reasonable holdings of HQLA securities(a) LCR requirements(b) CLF Amount(b)
31 Dec 2015 700 175 449 274
31 Dec 2016 780 195 441 246
31 Dec 2017 880 220 437 217
31 Dec 2018 905 226 474 248
31 Dec 2019 898 225 468 243
31 Dec 2020(c) 1340 362 550 188
31 Dec 2021 1488 446 582 136
31 Dec 2022 1608 563 <563 0

(a) Ahead of APRA's assessment of the CLF amounts to take effect in the following calendar year, the RBA published its projection of the market value of HQLA securities (Australian dollar denominated AGS and semis) that will be outstanding at the end of the following calendar year; this projection was based on information available from the Australian Government and state government borrowing authorities. The RBA also published its assessment of the amount of HQLA securities that can reasonably be held by locally incorporated LCR ADIs at that time.
(b) 'LCR requirements' refers to APRA's assessment of the aggregate Australian dollar net cash outflows for the locally-incorporated LCR ADIs at the end of the calendar year, including an allowance for the ADIs to have buffers over the minimum LCR requirement of 100 per cent, and taking into account ADIs' projected holdings of banknotes and ES balances. 'CLF Amount' is the difference between the LCR requirements and reasonable holdings of HQLA securities, or zero where reasonable holdings exceed LCR requirements.
(c) The Reserve Bank's projection of HQLA securities outstanding at the end of 2020 and assessment of the amount of these securities that can reasonably be held by locally incorporated LCR ADIs were updated in November 2020 to take into account the significant increase in the stock of HQLA securities outstanding during 2020. APRA's assessment of CLF amounts was also updated in late 2020. The initial amounts determined for end 2020 as part of the usual annual CLF process and published in 2019 were as follows: projected HQLA securities outstanding of $934 billion, reasonable holdings of $243 billion and CLF amount of $223 billion.

Sources: APRA; RBA

Before the size of the CLF was reduced to zero, a per annum fee was assessed on the size of the Reserve Bank's commitment, regardless of whether it was drawn or not (see Box below). The fee was set so that the CLF ADIs faced similar financial incentives to meet their liquidity requirements through the CLF or by holding HQLA. For 2015–2019, the Reserve Bank charged a CLF fee of 15 basis points per annum on the commitment to each CLF ADI. Following a review of the CLF fee conducted in 2019, the Reserve Bank increased the CLF fee to 17 basis points from 1 January 2020 and increased it to 20 basis points on 1 January 2021.

In practice, the CLF did not change the way ADIs access the Reserve Bank's existing standing facilities. The only difference is that in the absence of a CLF the Reserve Bank has made no contractual commitment ahead of time to transact repos with any ADI under its standing facilities; each individual repo is subject to the Reserve Bank's agreement. The CLF provided a means by which ADIs could obtain a contractual commitment from the Reserve Bank to extend funding subject to certain conditions. In particular, the Reserve Bank's commitment was always contingent on the ADI having positive net worth in the opinion of the Reserve Bank, following consultation with APRA.

The CLF allowed ADIs to hold towards their LCR requirement securities eligible in the Reserve Bank's operations that are not HQLA securities, provided a fee was paid on the CLF amount. As noted above, the Reserve Bank was willing to accept as collateral certain other debt securities (in addition to AGS and semis) in its operations. As is its standard practice, the RBA applied haircuts to the securities available to be presented, such that ADIs needed to hold securities with a higher value than the size of the CLF.

Box: Pricing the CLF

For the payment of a fee, the CLF gave ADIs the option of selling eligible securities to the Reserve Bank under repurchase agreement, with the (effective) repo rate set 25 basis points above the cash rate target.

In many respects, this arrangement was little different to how the Reserve Bank's standing facilities operated for an ADI without a CLF. However, for an ADI without a CLF there was (and remains) no contractual commitment by the Reserve Bank to provide standing liquidity arrangements and hence there was no fee. In this sense, the CLF fee can be seen as a means of charging the large ADIs an appropriate price for a liquidity option.

Ideally, the CLF should be priced so as to replicate the cost to an ADI of holding HQLA in a world where supply of HQLA is sufficient. However, this does not mean that the CLF fee should simply reflect the differential between yields on available HQLA (such as government bonds) and yields on those other securities eligible for the CLF.

Under the CLF, the Reserve Bank was only committing to provide funding against the value of a security at the time the facility is utilised, not the value at the time the commitment was established. Moreover, when the facility was utilised, the Reserve Bank discounted the security's value by a margin (or ‘haircut’); these margins vary depending on the type of security. Hence, the CLF was only (and not completely) insuring an ADI against the liquidity risk on its securities. The credit and market risks attached to the securities remained with the ADI. As is the case with all repos contracted by the Reserve Bank, should the value of a security provided to the Reserve Bank as collateral decline, the Reserve Bank demands that additional securities be delivered to restore the original value of the repo. Similarly, should the credit quality of a security held by the Reserve Bank fall below a certain threshold, the ADI is required to replace the security with one that meets the eligibility criteria.

Consequently, to derive the appropriate CLF fee from the yields of eligible securities, an adjustment had to be made for the non-liquidity premia (i.e. premia other than the liquidity premium, such as credit risk and term premia) embedded in these yields as well as for that part of the liquidity risk which the Reserve Bank is not insuring (namely, the haircut).

Theoretically, some indication of the cost of hedging liquidity risk can be extracted from term repo rates on eligible securities. For example, if a security can be funded overnight at the cash rate, the spread over cash at which a twelve-month repo in that security is priced indicates how expensive it is to hedge against not being able to roll the overnight repo at the cash rate continuously through that period.[4]

Few such long-term repos are contracted in the Australian market, however. As noted above, the CLF was similar to an option with a strike price set 25 basis points above the cash rate target. Of course, during periods of market stress, the cost of liquidity can rise significantly and it is the potential for this to occur that gives the option some value.

By design, the spread of 25 basis points to the cash rate exceeded the credit risk premium generally priced into overnight interbank loans. A similar argument can be made for the 25 basis point margin attached to repos accessed via the Reserve Bank's standing facility; the rate is high enough to discourage routine use (such borrowings typically only occur a few times a year) but not so high as to prevent ADIs from drawing on it when appropriate (in preference to failing on payments or otherwise disrupting the financial system).

Endnotes

APRA has determined that for the purposes of the LCR requirement, Australian Government Securities include Australian dollar debt securities of the Export Finance and Insurance Corporation (EFIC). [1]

Following a review, in June 2019, the Reserve Bank had assessed that ADIs using the CLF can increase their holdings of HQLA as a share of the stock of HQLA securities at a pace of 1 percentage point per year from 25 per cent in 2019 to 30 per cent in 2024. See https://www.rba.gov.au/media-releases/2019/mr-19-16.html. This more gradual increase in reasonable holdings is no longer required given the large increase in issuance of HQLA securities in 2020. [2]

See <https://www.apra.gov.au/news-and-publications/apra-phases-out-aggregate-committed-liquidity-facility>. [3]

‘Spread over cash’ in this context means the spread over an overnight indexed swap (OIS) rate for that term to maturity. As OIS are referenced to the cash rate, these spreads abstract from any expectation of a change in the cash rate that has been incorporated in longer-term repo rates. [4]