Australian lenders face tighter controls on liquidity requirements

Australia's banking regulator plans to allow lenders to hold bonds sold by state governments as part of the liquid asset buffers they must keep to protect depositors.

The Australian Prudential Regulation Authority will finalise new rules on liquidity requirements in mid-2011, it said in a letter to banks posted on its website, after saying in September that the regulations would be ready in the first half of next year.

"Liquid assets should have private market liquidity even when markets are under stress," said the letter, signed by general manager Charles Littrell. "APRA envisages adopting this operational definition which will, amongst other things, allow for semi-government securities to be included as high-quality liquid assets."

Regulators are planning tighter controls on banks, after the collapse of the US subprime mortgage market and Lehman Brothers Holdings fuelled the worst global recession since World War II and triggered A$1.7 billion of losses and writedowns at financial companies. APRA's letter followed a report published by the Basel Committee on Banking Supervision late last week, which said banks must increase the equity and retained earnings they hold to cope with losses better.

Securities banks sold after APRA released a discussion paper on its proposals in September won't be eligible for any concessions that may be offered as the rules are introduced, according to the letter.

APRA said on September 11 that it found banks had reduced the quality of their asset buffers before the financial crisis in search of returns.

The regulator's definitions of liquid assets will mean banks must buy government debt, while reducing holdings of each others' bonds.

- BLOOMBERG