Transcript of Question & Answer Session Liquidity

Maybe, Guy can I start. You spoke a lot about changes in the deposit market as regards retail consumers. How about things on the commercial side, anything you want to call out about that?

I highlighted – I mean it's right across the board on the deposit side. So one – and coming again back to something Professor Diamond said – so institutional investors aren't regarded as particularly sticky depositors and so if you have the deposit from another financial institution that's regarded as particularly unsticky, and so you've seen again banks being - not paying as high a rate of return on those … so retail is really good, corporate is pretty good, financial institutions not so good in terms of a deposit base. So obviously financial institutions still need to put their money somewhere but just they're not getting as good a rate of return as retail.

So you've seen both a shift in the maturity spectrum out wherever possible, but at the same time you've seen banks rejigging the composition or at least the amount of interest they're willing to pay different parts of their depositor base. So in the end you're still going to end up with roughly the same deposit base but those depositors are going to get slightly differentiated rates of return depending on how good a deposit they are to the bank.

How about questions, come on I can't believe we've - - -

Guy, given your international role - - -

There's the mike.

- - - given also your international role where you are sitting on a number of committees and boards I wonder whether you wish to compare how Australian banks are doing when it comes to liquidity compared to some comparable countries, if you like, around the world.

Well I mean the LCR kicks in fully for Australia this – the beginning of next year. Doug Diamond already mentioned about the US regime which is not dissimilar to ours. I mean, the European regime is a more phased-in approach to liquidity regulation as it is for most of Basel III. One thing which is interesting though is if you think about liquidity in the context of the US at the moment on one sense there is no shortage of liquidity given the size of the Fed's balance sheet and so some of the more binding aspects of the LCR and the net stable funding ratio for that matter, won't become apparent until I think we enter a more ‘normal’ liquidity regime. We are in a normal state of affairs here so the direct effect is very much – is very evident. In other regimes where there is sort of you know an excess of liquidity, the constraints that this new regime imposes is not quite so evident and as I said there are some jurisdictions which are only phasing this regime in – and I'm not going to get this exactly right – but over the next two or three years and so again some of the effects are not binding.

One of the things which we noticed here particularly around the deposit repricing is we were sitting there waiting for this to happen for quite some time and it's only really happened in the last few months in terms of, particularly around the adjustment of the conditions. So you know for instance an at-call savings account is not a particularly attractive beast from the bank's point of view because you know that the investor can just withdraw that whenever they want and we've – but we've seen the competition in that space had been pretty hot up until probably only three or four months ago, it's only just started to back off now. So you know a lot of this repricing and rebranding occurs fairly late in the piece and in some jurisdictions I suspect they haven't got there yet.

And I think if I'm right you said last year Guy that you were expecting the changes to go pretty well down to the wire, and that's what's happened.

Yeah that's pretty much what's happened.

Exactly. Did I see some hands up the back? Yes please.

Sue Lannin from the PM Program on ABC Radio. So Mr Debelle if you think – you said there's not enough high quality liquid assets in Australia, held by Australian banks, so would there be systemic risk in the case of another financial crisis?

So the reason why there aren't enough is, as I said, for a good reason which is there hasn't been a – so most jurisdictions, it's government debt is the bulk of the – makes up the bulk of the stock of high quality liquid assets. We don't have a large stock of government debt which is generally regarded as a good thing not a bad thing. Consequently – but that's why we've designed the regime we've designed which hasn't been tested obviously and hopefully won't be, but we presume that it will work to deliver the same sort of incentives, and very much the incentives along the lines that Doug Diamond was talking about, to deliver the desirable liquidity outcomes.

So one of the potential solutions to this problem was for the government to issue a very large amount of debt. That seemed to be a fairly perverse way to address this solution, so we didn't go down that route. So as I said we've come up with a regime which is consistent with the Basel standards, is actually mentioned in the Basel standard, which we think will deliver the same sort of outcomes and to very much address the sort of issues you were talking about.

Can I just ask one quick follow up. Do you think the banks are still too reliant on wholesale funding? Of course since the GFC they've increased the deposits they hold on their books.

So the bottom line is I don't think so. I think wholesale funding is a part of the funding mix. One thing which I've mentioned on previous occasions and it's reflected in some of that there. So a 90-day bank bill and a 90-day deposit are not that fundamentally different from a liquidity point of view. One is wholesale funding or one is deemed to be wholesale funding and the other one is deemed to be deposit funding. If you take the example of Northern Rock for instance, yes they had a funding mix which proved to be unstable but they also had a deposit run too. So the depositors have proved quite adept on running on them just as much as the wholesale side of things.

wholesale funding bad, deposit funding good. They're all part of the funding mix and it's really the behavioural characteristics and the terms of maturity which matters. And the liquidity regime – both the LCR and the NSFR – are very much around addressing – making sure the banks do the right, from a social point of view, amount of liquidity transformation; not too much, not too little. And to achieve that outcome will require a mix of funding not – you know, as Doug Diamond said one solution to this problem is that the banks hold 100% liquid assets and are completely depositor-funded, sort of a narrow banking model, that's one extreme, probably doesn't deliver society its best form of financial intermediation.

So there's always going to be some mix of funding across the spectrum. There have clearly been some funding models which are demonstrably not good and there are some which are probably too good and so the challenge is of finding the appropriate mix in between.

Did I see one last question, perhaps there if we can get a mike down the front - - -

I was going to ask Guy how did you come up with the 15 basis point figure for the CLF?

So you can look at that, we put up - - -

You might repeat the question.

Yeah so the question is how – I mentioned that we charge a 15 basis points fee which is for the access to the CLF, how do we come up with that?

So the answer to that is on our website but I can try and summarise it quickly here now which is basically we sought to replicate, and coming to the question just asked before, the same incentives that you would have if there was enough government debt on issue. So if you try and extract a liquidity premium from government debt, try and put some value on that, not a particularly easy thing to do, then that's – that was our best estimate of that. So the incentive for the bank is the same either way, either if they were holding enough government debt if there was enough for them to hold or by accessing this facility. So it's designed to replicate the same sort of incentives that you would have in other jurisdictions where there is enough government debt to be able to use.